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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Earnings Before Interest and Taxes (EBIT)

What it is:

Earnings Before Interest and Taxes (EBIT) measures the profitability of a company without taking into account its cost of capital or tax implications.

How it works (Example):

EBIT is calculated using information provided on a company’s income statement.
Using company XYZ as our example,

Income Statement
For the Year Ended Dec 31, 2xxx
 

Sales Revenue $1,000,00
Other Expenses $800,000
Earnings Before Interest and Taxes $200,000
Interest Expenses $50,000
Earnings Before Income Taxes $150,000
Income Tax Expense $50,000
Net Income $100,000

In this example, EBIT is $200,000 while net income is $100,000.

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Why it Matters:

EBIT provides investment analysts with useful information for evaluating a company’s operating performance without regard to interest expenses or tax rates. EBIT helps minimize these two variables that may be unique from company to company, and enables one to analyze operating profitability as a singular measure of performance. Such analysis is particularly important when comparing similar companies across a single industry where those companies may have varying capital structures or tax environments.

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