EBIT stands for Earnings Before Interest and Taxes. It is a company's operating profit — what the core business earns before the cost of financing (interest) and tax are deducted. EBIT answers "how profitable are the operations themselves?", independent of how the business is funded or where it is taxed.
The EBIT formula
Two equivalent routes:
- Top-down: EBIT = Revenue − Cost of goods sold − Operating expenses
- Bottom-up: EBIT = Net income + Interest + Taxes
EBIT is the same thing accountants usually call operating income.
EBIT vs EBITDA
The single difference is depreciation and amortisation:
- EBITDA = EBIT + Depreciation + Amortisation
- EBIT = EBITDA − Depreciation − Amortisation
EBITDA adds back the non-cash D&A charges, so it sits above EBIT. EBIT keeps D&A in, which makes it a more conservative profit measure for capital-intensive businesses where asset wear-and-tear is a real economic cost.
A worked example
| Line | Amount |
|---|---|
| Revenue | $3,000,000 |
| − Cost of goods sold | ($1,800,000) |
| − Operating expenses | ($900,000) |
| EBIT (operating income) | $300,000 |
Add back $100,000 of depreciation and amortisation and EBITDA is $400,000.
When EBIT is used
EBIT underpins the operating margin (EBIT ÷ revenue) and the unlevered free-cash-flow build-up. Analysts use EV/EBIT alongside EV/EBITDA when comparing companies with very different capital intensity.
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