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Friday, January 21, 2011

Earnings before interest and taxes

In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profitability that excludes interest and income tax expenses.Operating income is the difference between operating revenues and operating expenses. When a firm has zero non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.
EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income
Operating Income = Operating Revenue – 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.


Statement of Income — Example
(figures in millions)
Operating Revenue
     Sales Revenue$20,438
Operating Expenses
     Cost of goods sold$7,943
     Selling, general and administrative expenses$8,172
     Depreciation and amortization$960
     Other expenses$138
         Total operating expenses$17,213
Operating income$3,225
     Non-operating income$130
Earnings before Interest and Taxes (EBIT)$3,355
     Net interest expense/income$145
Earnings before income taxes$3,210
     Income taxes$1,027
Net Income$2,183

(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)


(source:wikipedia)

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