Crash Course in Accounting and Financial Statement Analysis, Second Edition

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 Sold 20 – SG&A (inc. R&D) 15 EBITDA 65 – D&A 10 EBIT 55 – Interest Expense 5 Taxes 20 Net Income 30 EBIT (Operating Profit or Operating Income) Revenues – COGS – SG&A – R&D – D&A or Net Income + Taxes + Interest Expense