Particularly during the reporting season (when companies publish their quarterly results), investors often focus on the most important fundamental key figures, first and foremost among which is the company's profit. However, profit is not equal to profit; a distinction is mainly made between net income and operating profit. The latter is expressed by the key figure EBIT. In this article, you will learn what EBIT is, how it is calculated and what significance it has.
What is EBIT?
EBIT is the earnings or profit of a company before interest and taxes. The English abbreviation stands for Earnings Before Interest And Taxes. EBIT is also referred to as operating result or operating profit and is a key figure from business administration.
What is the purpose of EBIT?
Rising profits and sales are one of the most important indicators of a company's success and play an important role in fundamental analysis and valuation. In addition to net income, EBIT is an important key figure that is more suitable than net income for certain analysis purposes.
As taxes and interest vary from country to country, it makes sense for an international comparison not to take these into account and therefore to use EBIT (earnings before interest and taxes). In addition, EBIT does not take into account any expenses that have nothing to do with the actual activities of the company. It is therefore limited to the operating result, which may allow a better evaluation of the company.
Formula
There are two methods for calculating EBIT. Either sales revenue (1.) or net income (2.) can be used as the basis.
The two formulas for calculation are:
- EBIT = sales - cost of sales - operating costs (operating expenses)
- EBIT = net income + interest + taxes resp.
EBIT = net income + interest expense - interest income + tax expense - tax income