• September 2019
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EBIT

1. An acronym that stands for Earnings Before Interest and Taxes. It is used to measure a company’s profitability. Like simple earnings, it is calculated by subtracting expenses from revenue. Unlike an earnings calculation, however, it does not consider interest and taxes as expenses. EBIT is sometimes referred to as operating profit or operating earnings.

Taxes are removed from the equation as a way to compare the earning abilities of various companies while recognizing that they may have different tax burdens. One company may benefit from a tax break in a given year, for instance, and that break would be reflected in net profits, but it wouldn’t necessarily reflect the company’s earning potential over time.

Interest is removed from this equation for much the same reason. Companies often go into debt when making capital investments (such as buying new equipment, building new facilities, etc.). The interest paid on that debt can skew the calculation of a company’s profitability and make it hard to do an apples-to-apples comparison between companies in different industries. Therefore, when analyzing EBIT (which, to note again for the people in the back, stands for “earnings before interest and taxes”) it is important to keep the context of such calculations in mind.

2. Personal finance: the figure on a paystub that generates excitement before you realize that it is not your take-home pay.

 

EXAMPLE:

Friend One: “Wow, this new job pays a lot better than my old one.”
Friend Two: “You’re looking at the wrong number. That’s EBIT. Keep reading.”