The EBIT Calculator is a tool that helps you calculate EBIT - one of the most popular and vital indicators of success in business and finance. What is it? Keep reading. You are in the right place to learn about it!
Below you will find some information about what EBIT is, how to calculate EBIT and a quick comparison: of "EBIT vs. EBITDA". We hope this article will fulfill your expectations and quench your thirst for knowledge.
What is EBIT?
EBIT (Earnings Before Interest and Taxes) is the operating profit - the profit before deduction of taxes and interest. This rate is used to compare the operations of different companies in given periods. EBIT makes such a comparison possible because it doesn't include interest rates or how the companies exploit the financial leverage or tax burden. It considers only the basic activity of a company that is probable to repeat in the future, so it shows its real capabilities to generate earnings.
EBIT lets you measure a company's potential, so it can be very useful and helpful in some cases: for example, when an investor wants to buy an enterprise out or when we want to compare different companies which operate in different tax systems or have different strategies.
We can distinguish between two different points of view at EBIT: accounting and finance. Considering the first one, we can say that EBIT is 'the sales decreased by operating costs', while from the second perspective, it can be explained as 'the gross profit decreased by interest'.
EBIT vs EBITDA
As we already know what is EBIT, we can smoothly go to a comparison: "EBIT vs EBITDA". EBITDA is a very similar rate. First of all, let us expand the abbreviation: Earnings Before Interest, Taxes, Depreciation, and Amortization. As we can see in its full name, it uses all of the same values as EBIT, but it includes two additional aspects: depreciation and amortization (DA). It works similarly - it is also used to compare the profitability of companies only on the grounds of data connected with their basic activity; it also omits the effort of their financial strategy or tax system. Actually, EBITDA is very easy to calculate: you simply need to add DA to EBIT.
How to calculate EBIT?
As we already have some basic information about this indicator, it's high time we learned how to calculate EBIT. In simple words, EBIT is the revenue decreased by expenses excluding taxes and interest, so we can use this formula to calculate it:
EBIT = revenue - operating expenses
For example, imagine a company with:
- Revenue: 50,000 $ and
- Operating expenses: 24,000 $.
The EBIT for the above company will be:
50,000 - 24,000 = 26,000 $
Then, having the same data from another company, we can easily compare them and see which works more effectively.
We hope this text has helped you understand what EBIT is and how it is used in business. If you are - or plan to be - a businessman, we wish you the best of luck!