In finance, EBIT, also known as earnings before interest and taxes, measures a company’s profitability. It is also known as operating profit, operating earnings, and profit before interest and taxes.
The formula to work out EBIT is as follows:
EBIT = Net Income + Interest + Taxes
EBIT = Revenue – Cost of Goods Sold – Operating Expenses (e.g. wages)
EBIT focuses on a company’s ability to produce profit — ignoring external variables. It can be used to compare profitability from company to company as well as within the same company year over year.
Before judging a company’s EBIT, it is important to know what the industry standard is. This differs sector to sector.
EBIT can also be used when calculating financial ratios. One such ratio is the interest coverage ratio which uses the following formula:
Interest Coverage Ratio = EBIT / Interest Expense
However, EBIT includes depreciation as part of its calculation. This can lead to misleading results when comparing companies with a lot of fixed assets and a company with fewer fixed assets. This issue is addressed with EBITDA and net operating income (NOI).
EBIT or EBITDA?
Unlike EBIT, EBITDA includes depreciation and amortization expenses when calculating a company’s financial performance.
The EBITDA formula is as follows:
EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization
This means EBITDA calculates a company’s operational performance without considering interest, taxes or capital assets. This allows for a more direct comparison of a company’s performance.
EBIT or NOI?
EBIT is not to be confused with net operating income (NOI), which calculates the profitability of real estate.
The formula to work out NOI is as follows:
NOI = Real Estate Revenue – Operating Expenses
NOI does not take depreciation and amortization expenses into account, whereas EBIT does. EBIT measures the profitability of a company and NOI measures the profitability of real estate.