Earnings before interest and taxes (EBIT) is a measure of profitability (like gross profit, EBITDA, and net income), and measures a company’s core profitability based on industry factors, without taking into effect a firm’s financial leverage or taxes.
EBIT/Sales ratio is usually referred to as Operating Profit Margin and is used to find the most efficient operator in a particular industry.
EBIT has most of the EBITDA shortcomings discussed earlier:
It is not a good measure of cash flow:
Does not take into account debt payments, capital expenditures, and working capital
Includes D&A—noncash items
Note that since EBIT does take into account D&A expense (stemming from capital investments and acquisitions), it avoids the limitation of EBITDA arising in capital-intensive industries.
Sample Income Statement
EBIT (Operating Profit or Operating Income)
Revenues – COGS – SG&A – R&D – D&A
Net Income + Taxes + Interest Expense