Earnings before interest and taxes (EBIT) indicate how effectively a company generates earnings over a specific period of time.
EBIT appears on the income statement before deducting interest and expenses or revenues from one-time events, providing a business with the most accurate picture of its operating potential. This is why it is also often referred to as operating income or operating profit.
A company’s EBIT can be compared with that of other companies in the same industry to judge how well it is doing. Because all companies carry different debt loads and they incur different one-time events, more insight is gained by doing a comparison before those deductions are made.
Business owners and managers use EBIT to compare results against their plans and to make adjustments in the current operating period. In addition, trend analyses are completed to plan and make adjustments over longer periods.
Investors use EBIT to decide if they want to change their ownership position in a company. Bankers use it as a secondary figure to determine if they should provide more debt—the primary figure being EBITDA (earnings before interest, taxes, depreciation and amortization).
More about earnings before interest and taxes
The income statement below shows the earnings before interest and taxes for a wholesale company with revenues of $100,000, cost of sales of $35,000 and SG&A expenses of $25,000.