EBIT
$$\text{EBIT} = \text{Net Income} + \text{Interest Expense} + \text{Tax Expense}$$
What is EBIT?
EBIT (Earnings Before Interest and Tax) is Operating Profit - the income generated from a company's core business activities after deducting COGS and all operating expenses (including depreciation and amortization), but before accounting for how the business is financed (interest) or taxed.
EBIT is used interchangeably with "Operating Profit" and "Operating Income" in most contexts. It sits between Gross Profit (which only deducts COGS) and EBT (which further deducts interest) on the income statement. The difference between EBIT and EBITDA is depreciation and amortization - adding D&A to Net Income stops at EBIT before reaching EBITDA.
EBIT is the cleanest measure of operational performance when comparing companies with similar asset bases. Unlike EBITDA, it does not ignore the cost of using long-lived assets. Unlike Net Income, it removes the distortion of different capital structures and tax environments.
When to use EBIT
Use EBIT to compare the operational efficiency of companies with similar capital intensity but different financing structures. It is particularly useful when a company has recently refinanced its debt (changing interest expense) or when comparing companies across different countries with different tax rates.
Worked examples for EBIT
This table quickly gives you the overview you need to understand EBIT and its most important comparisons.
| Item | Company A | Company B |
|---|---|---|
| Revenue | $20,000,000 | $20,000,000 |
| COGS | $8,000,000 | $8,000,000 |
| Gross Profit | $12,000,000 | $12,000,000 |
| Operating Expenses | $7,000,000 | $7,000,000 |
| EBIT | $5,000,000 | $5,000,000 |
| Interest Expense | $500,000 | $2,000,000 |
| EBT | $4,500,000 | $3,000,000 |
| Net Income (30% tax) | $3,150,000 | $2,100,000 |
Common pitfalls
EBIT includes depreciation, which means it can understate cash generation for asset-heavy businesses with high D&A. On the other hand, EBIT is more conservative than EBITDA - it penalises businesses that require heavy capital investment. For M&A purposes, acquirers typically use EBITDA; for lending and operating comparisons, EBIT is often more useful.
Frequently asked questions about EBIT
Is EBIT the same as Operating Profit?
Yes. EBIT, Operating Profit, and Operating Income are the same metric. All three measure profit from core operations before interest and tax.
What is the difference between EBIT and EBITDA?
EBITDA = EBIT + Depreciation + Amortization. EBITDA adds back the non-cash D&A charge to show a closer approximation of cash profit. EBIT reflects the true cost of using assets (via depreciation) while EBITDA ignores it.
When is EBIT margin more useful than EBITDA margin?
EBIT margin is more useful when comparing companies with similar capital intensity, because it includes depreciation as a cost. EBITDA margin is preferred when comparing companies with very different depreciation policies or when assessing cash generation potential.
Quiz: how well do you know EBIT?
1. What does EBIT stand for, and what does it measure?
2. What is the mathematical relationship between EBIT and EBITDA?
3. In the examples table, Company A and Company B both report $5,000,000 EBIT. Company A pays $500,000 in interest; Company B pays $2,000,000. At a 30% tax rate, what is Company B's net income?
4. The pitfalls section notes that EBIT includes depreciation. What consequence does this have for asset-heavy businesses?
5. According to the FAQ, when is EBIT margin more useful than EBITDA margin?