Earnings before interest and taxesIn accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.[1][2]

Operating income and operating profit are sometimes used as a synonym for EBIT when a firm does not have non-operating income and non-operating expenses.[3]

Formula

EBIT = (net income) + interest + taxes = EBITDA – (depreciation and amortization expenses)Operating income = (gross income) – OPEX = EBIT – (non-operating profit) + (non-operating expenses)[3]whereEBITDA = earnings before interest, taxes, depreciation, and amortizationOPEX = operating expense

Overview

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

Example statement of income (figures in thousands)[1]RevenueSales revenue$20,438Cost of goods sold$7,943Gross profit$12,495Operating expensesSelling, general and administrative expenses$8,172Depreciation and amortization$960Other expenses$138Total operating expenses$9,270Operating profit$3,225Non-operating income$130Earnings before interest and taxes (EBIT)$3,355Financial income$45Income before interest expense (IBIE)$3,400Financial expense$190Earnings before income taxes (EBT)$3,210Income taxes$1,027Net income$2,183