EBIT: Formula and Examples

What is EBIT?

Earnings Before Interest and Taxes (EBIT) is a financial measure that calculates the earnings of a company before taking out the expenses for interest and taxes. It is one of many profitability figures. EBIT is a non-GAAP financial measure, which means it does not follow Generally Accepted Accounting Principles (GAAP). If EBIT is presented in a company’s notes to its financial statements, it should be reconciled to the GAAP reported net income. 

What is EBIT Used For?

EBIT can be used by financial analysts and investors in several financial ratios. The interest coverage ratio uses either operating profit or EBIT and divides the amount by interest expense to determine the company’s ability to cover its debt obligations with its current level of income. 

What is the Formula for EBIT?

EBIT = Net Income + Interest Expense + Taxes

OR

EBIT = Revenue + Non-Operating Income - COGS - Operating Expenses

Non-Operating Income

Non-operating income is the portion of a company’s income that is unrelated to its day-to-day business. Non-operating income includes items such as:

• Interest income
• Gains (or losses) from foreign currency exchange
• Gains (or losses) from sale of fixed assets
• Gains (or losses) from one-off situations like an insurance payout

COGS (Cost of Goods Sold)

Costs of goods sold (COGS) are the expenses incurred by a company that are directly related to manufacturing or producing a good or service. COGS includes items such as:

• Labor costs
• Materials costs

Operating Expenses

Operating expenses are not directly related to the production of a good or service. Operating expenses include items such as:

• Selling, general, and administrative (SG&A) expenses
• Rent 
• Utilities

EBIT Calculation Example 

Here is an income statement for ABC Company. Using the information from this income statement, you can back into ABC Company’s EBIT. 

There are two methods to calculate EBIT from this information. You can calculate it from the top down or from the bottom up, using figures from the income statement. Here is the calculation of EBIT starting at net income:

$9,750 + $3,250 + $5,000 = $18,000 

Where:

• $9,750 = Net Income
• $3,250 = Income Taxes
• $5,000 = Interest Expense

Alternatively, here is the calculation of EBIT starting at sales revenue:

$60,000 + $2,500 + $500 - $35,000 - $10,000 = $18,000 

Where:

• $60,000 = Sales Revenue
• $2,500 = Interest Income
• $500 = Other Non-Operating Income
• $35,000 = Cost of Goods Sold (COGS)
• $10,000 = Selling, General, and Administrative Expenses (SG&A)

Both of the methods to calculate EBIT return the same $18,000 million result. Calculating EBIT both ways is a good way to double check your calculations. Essentially, EBIT is exactly what the term describes– a company’s earnings figure that includes everything but interest and tax expenses. 

What is the Difference Between EBIT and EBITDA?

The main difference is that EBITDA is calculated before depreciation and amortization expenses. As such, for companies with a significant amount of fixed assets and depreciation expense, EBITDA can be a much larger profit measure than EBIT. 

Earnings Before Interest and Taxes (EBIT) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) are similar because both remove the interest costs related to debt financing and taxes from a company’s profits. Both are non-GAAP financial measures.

What is the Difference Between EBIT and Operating Profit?

The term EBIT is sometimes used interchangeably with the term operating profit– or operating income. However, it has some differences. Operating profit is a GAAP approved financial measure, and it appears directly on the income statement. Operating profit is simply the profit a company earns in its day-to-day businesses. It excludes all income and expenses that are unrelated to the company’s core business. These unrelated items are referred to as non-operating income and expenses. As such, EBIT includes non-operating income such as a one time gain or interest income– although interest expense is excluded– while operating profit always excludes non-operating income. 

What are the Limitations of EBIT?

The main limitation of EBIT is that it’s not presented on a GAAP compliant income statement, so it is not as easy to identify and compare EBIT for multiple companies. Gross profit, operating profit, and net income are all GAAP approved profit measures that commonly appear on the income statement. These figures would be easier to identify and compare across multiple companies– or for a year-over-year analysis to identify trends within one company. 

Since EBIT does not include interest expense, it is not appropriate to use EBIT when comparing two companies that have vastly different debt financing structures. Assume Company A utilizes more debt financing. It will have much higher interest expense. If Company B utilizes more equity financing, its interest expense will be much lower. Looking at EBIT alone, Company A would appear to be in a great financial position because EBIT does not include interest expense. However, if you compare net income for both companies, Company A’s significant interest expense will bring the net income down.

Real Company Example: Walmart’s EBIT

Walmart’s 2023 Annual Report included this Consolidated Statement of Income. 

Using the calculation for EBIT that starts with net income:

$11,292 + $5,724 + $1,787 + $341 = $19,144 

Where: 

• $11,292 = consolidated net income
• $5,724 = provision for income taxes
• $1,787 = debt interest expense
• $341 = finance lease interest expense

Using the calculation for EBIT that starts with revenue:

$611,289 + $254 - $1,538 - $463,721 - $127,140 = $19,144

Where:

• $611,289 = total revenues
• $254 = interest income
• $1,538 = other loss
• $463,721 = cost of sales (COGS)
• $127,140 = operating, selling, general, and administrative expenses

Note, the “other loss” is subtracted in this calculation because it was a loss rather than a gain. Both calculations result in the $19,144 million figure for EBIT.

Additional Resources

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