Earnings before interest and taxes - AbsoluteAstronomy.com

Accountancy

Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...

and finance, earnings
Earnings
Earnings are the net benefits of a Corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before...

before interest and taxes (EBIT) is a measure of a firm's profit

Profit (accounting)

In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...

that excludes interest and income tax expenses. Operating income is the difference between operating revenues and operating expenses. When a firm has zero non-operating income

Non-operating income

Non-operating income, in accounting and finance, represents gains or losses from sources not related to the typical activities of the business or organization. Non-operating income can include gains or losses from investments, property or asset sales, currency exchange, and other atypical gains or...

, then operating income is sometimes used as a synonym for EBIT and operating profit

Profit (accounting)

.

EBIT = Revenue

Revenue

In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

– Operating expense

Operating expense

An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure , is the cost of developing or providing non-consumable parts for the product or system...

s (OPEX) + Non-operating income

Non-operating income

Operating income = Revenue – Operating expenses

A professional investor contemplating a change to the capital structure

Capital structure

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80...

of a firm (e.g., through a leveraged buyout

Leveraged buyout

A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...

) first evaluates a firm's fundamental earnings potential (reflected by Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA

EBITDA

EBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization. It is a non-GAAP metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income...

and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g., the cost of goods sold

Cost of goods sold

Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

, selling and administrative expenses) are subtracted from revenues. Profit

Net income

Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings...

is later obtained by subtracting interest and taxes from the result.

Statement of Income — Example (figures in millions)
Revenue
Sales Revenue	$20,438
Operating Expenses
Cost of goods sold	$7,943
Selling, general and administrative expenses	$8,172
Depreciation Depreciation Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used .... and amortization Amortization Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...	$960
Other expenses	$138
Total operating expenses	$17,213
Operating income	$3,225
Non-operating income	$130
Earnings before Interest and Taxes (EBIT)	$3,355
Net interest expense/income	$145
Earnings before income taxes	$3,210
Income tax Income tax An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate... es	$1,027
Net Income	$2,183

(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)

See also