In accounting and finance, earnings before interest and taxes (EBIT), is a measure of a firm's profit that includes all expenses except interest and income tax expenses. It is the difference between operating revenues and operating expenses. When a firm does not have non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.
EBIT = Revenue â€" Operating expenses (OPEX) + Non-operating income
Operating income = Revenue â€" Operating expenses
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 vs. equity.
To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues. Profit is later obtained by subtracting interest and taxes from the result.
(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)
See also
- Earnings before depreciation, interest, and taxes (EBDIT)
- Earnings before interest, taxes, depreciation and amortization (EBITDA)