EBIT (Earnings Before Interest and Taxes)

Earnings before interest and taxes is one of the items which is being taken into consideration by the organizations in line with operating profits, operating earnings, profit before interest and tax, and operating income. The income derived by the organization before paying off interest and taxes is being termed as income before interest and taxes. This figure helps the organization to ensure that it is being working towards making easier comparisons without any kind of trouble or issue arising at a particular point. If the organization does not have knowledge of EBIT then, it is not going to be possible for it to ensure that, it is being working towards identifying its leverage in a proper way.


EBIT is the abbreviated term for earnings before interest and taxes. It is being used for doing estimation of earnings per share. It is being calculated by making use of income statement of the organization. In the income statement, details regarding revenues earning by the organization and expenses being incurred by it are being taken into consideration. If the organization can find out EBIT then, there are higher chances for the organization to have comparison of earning capacity of various organizations across a single industry and it also works towards establishment of benchmarks for ensuring the comparison of the organization is being carried out in a proper and appropriate way.


Finding EBIT

To identify EBIT, one has to ensure that, he is being deducting variable and fixed costs incurred by the organization from its revenues (George, 2009). Operating expenses of the organization include wages, research and development expenses, rent paid and other categories of expenses being incurred by the organization. The other expenses being incurred by the organization would include the expenses in the name of selling and distribution expenses, and administration expenses. All these expenses are crucial and must be taken into account for the purpose of finding earnings before interest and taxes of an organization.


EBIT Margin

It is the correlation regarding income earned by the organization before interest and taxes to the revenue being earned by it. There could be difference in profitability of the organization in case; there is difference in the margin being earned by it. Comparison of EBIT of various organizations is a useful thing to be carried out by the organization in the course of ensuring that, best results are being generated in the area of doing the tasks. If EBIT margin is small then, it means there is high sales volume. A positive EBIT margin can help the organization to ensure that, it generates greater value in the course of doing the tasks at a particular point of time. EBIT and net revenue is necessary for calculation of EBIT margin of the organization. The formula to be used for this particular calculation is being provided here. 


Equation


Example of EBIT Margin

EBIT = $ 2855m
Net Revenue Earned = $ 3905m
EBIT Margin (2013) = 65%

Therefore,


Equation


There has been an increase in EBIT margin of ABC Company since last year. This depicts an efficient profitability status of the company as it has been raised by 8.11%.



Rutherford Corporation Income Statement ($ in Millions)


Particulars

Amount (in $)

Net Sales

1409

Less:- Cost of goods sold

(460)

Less:- Depreciation

(55)

EBIT

894

Less:- interest Paid

(170)

Taxable income

724

Less:- taxes

(312)

Net Income [Earnings After Interest & Taxes]

412

 

Looking at income statement of Rutherford Corporation it is being identified that, earnings before interest and taxes is at the level of $894. Here, depreciation is a non cash expense therefore; it is required to be added back by the organization.


EBIT and Net Income

EBIT and net income are not the same. Net income of the organization is being identified at the point when, taxes and interest expenses being incurred by the organization are being deducted from the income. Net income is the amount which is being available to the owners of the organization. An organization could have negative EBIT and net loss. This occurs when, expenses are higher in comparison to income being generated by the organization.

 

References

George, T. (2009). Financial Management and Analysis. Routledge

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