EBIT

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

Revenues$100
– Cost of Goods Sold20
– SG&A (inc. R&D)15
EBITDA65
– D&A10
EBIT55
– Interest Expense5
Taxes20
Net Income30

EBIT (Operating Profit or Operating Income)

Revenues – COGS – SG&A – R&D – D&A

or

Net Income + Taxes + Interest Expense

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