EBIT in simple words — and how to calculate it

In this article, we will look at one of the financial indicators for analyzing companies called «EBIT». It is in many ways similar to the previously discussed EBITDA, but has a number of differences.

What is EBIT in simple terms

EBIT (abbreviation «Earnings Before Interest and Taxes», translation: «earnings before income and taxes») is a financial indicator that reflects earnings before interest and taxes.

We can say that EBIT is an intermediate indicator between gross and net profit.

EBIT formula:

EBIT= [Run before tax] + [Percentage payable] EBIT = line 2300 + line 2330

EBIT can take negative values.

Do not confuse EBIT with operating income (OIBDA). The latter does not include income and expenses from other operations.

EBIT is not considered mandatory in either domestic or international (IFRS) accounting standards. And it can be calculated a little differently, which can cause unreliable data.

Why do you need EBIT at all?

Since different countries have different tax rates, this has a strong impact on net income. This indicator is devoid of this minus and allows you to compare companies in different countries. At the same time, EBIT does not take into account the borrowed funds of the company.

So you can easily evaluate the effectiveness of the company in making money. It is necessary to compare businesses from the same sector.

Three more formulas for calculating EBIT:

EBIT = Revenue (line 2110) – Cost of sales (line 2120) – Selling expenses (line 2210) – Administrative expenses (line 2220) + Income from participation in other organizations (line 2310) + Interest receivable (line .2320) + Other income (line 2340) – Other expenses (line 2350)

EBIT = Management expenses (2200) + Income from participation in other organizations (2310) + Interest receivable (2320) + Other income (2340) — Other expenses (2350)

EBIT = Net income (2400) + Other (2460) + Change in deferred tax assets (2450) + Change in deferred tax liabilities (2430) + Line 2410 + Interest expense (2330)

Differences between EBIT and EBITDA

EBITDA is distinguished by the presence of accounting for depreciation of fixed assets and intangible assets. EBIT does not include depreciation. EBITDA is most commonly used when comparing companies.

The lower the EV/EBITDA, DEBT/EBITDA, the cheaper the company is valued.

See also the video «Financial Vocabulary #3: What is EBIT?»:

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