Earnings before interest and taxes

In accounting and finance, earnings before interest and taxes (EBIT) or operating income is a measure of a firm's profitability that excludes interest and income tax expenses.^[1]^[2]

EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income

Operating Income = Operating Revenue – Operating Expenses^[1]

Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.^[3] This is true if the firm has no non-operating income.

A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues.^[4] Profit is later obtained by subtracting interest and taxes from the result.

Statement of Income — Example (figures in millions)
Operating Revenue
Sales Revenue	$20,438
Operating Expenses
Cost of goods sold	$7,943
Selling, general and administrative expenses	$8,172
Depreciation and amortization	$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 taxes	$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.)

References

^ ^a ^b Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0 07 251077 3
^ EBIT | Abinomics.com
^ http://www.investorwords.com/3460/operating_income.html Operating income definition
^ http://www.investorwords.com/1631/EBIT.html EBIT definition

References

See also