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EBT Calculator — Earnings Before Tax

Created by Wei Bin Loo
Reviewed by Tibor Pál, PhD candidate and Steven Wooding
Based on research by
Brigham, E.F.; Ehrhardt, M.C. Financial Management: Theory and Practice; 2016
Last updated: Jan 18, 2024


The EBT calculator can help you calculate the pre-tax earnings of your company, allowing you to assess operational efficiency and profit potential before the impact of taxation. To understand more about evaluating a company through earrings metrics, please check out the EBIT calculator and EBITDA calculator.

This article will also help you to discover:

  • What is EBT?
  • How to calculate EBT using the earnings before tax formula?
  • What is the importance of EBT?

What is EBT? What is earnings before tax?

Earnings before tax (EBT), also known as profit before tax, is an indicator of a company's profitability, calculated before taxes are subtracted. It is an interim figure that sits between operating profit and net income in an income statement.

EBT takes into account all revenues, costs, and expenses but excludes the cost of tax, providing a clear picture of an organization's operational efficiency.

This profitability measure is beneficial as it ignores the impact of the tax shield, making it easier to compare the profitability of companies across different tax jurisdictions. Furthermore, it allows investors and analysts to understand the company's performance without the influence of tax strategies or variations in tax rates.

How to calculate the EBT

To understand the earnings before tax calculation, let's look at Company Alpha with the following financial information:

  • Revenue: $1,000,000
  • Cost of goods sold (COGS): $300,000
  • Selling, general, and administrative expenses (SG&A): $150,000
  • Depreciation and amortization (D&A): $150,000
  • Interest expense: $200,000
  • Other income: $100,000
  1. Compute the gross profit

    The first step is to calculate the gross profit using the following formula:

    gross profit = revenue - COGS

    So, the gross profit for Company Alpha is $1,000,000 - $300,000 = $700,000. To understand more about revenue, check out our revenue calculator.

  2. Calculate the operating expenses

    The next step for us is to calculate the operating expenses. This can be calculated using the formula below:

    operating expenses = SG&A + D&A

    Using this formula, Company Alpha's operating expenses is $150,000 + $150,000 = $300,000. To understand more about D&A, please check out the depreciation calculator.

  3. Determine the interest expense

    Now, we need to understand the interest expense of the company. This is the cost of debt the company has taken on.

    For our example, the interest expense is $200,000.

  4. Determine the other income

    We will also need to determine if the company has earnings from non-core business activities, such as profits from investments or the sale of assets. The other income for Company Alpha is $100,000.

  5. Calculate the earnings before tax (EBT)

    The last step is to put everything together and calculate the EBT using the earnings before taxes formula:

    EBT = gross profit - operating expense - interest expense + other income

    Thus, the Company Alpha's EBT is $700,000 - $300,000 - $200,000 + $100,000 = $300,000.

The importance of EBT

So, now that we understand how to calculate EBT, why should we care about earnings before tax?

First, EBT is a useful measure of the actual operational performance of a company. It cuts through differences in tax regimes, providing a clearer comparison across firms in different countries or states. This helps investors to analyze businesses on an 'apples-to-apples' basis.

Second, EBT allows analysts to evaluate the efficiency of the management. A higher EBT may indicate that a company's management is adept at controlling costs and generating revenue, irrespective of its tax strategies.

Lastly, EBT is valuable for forecasting future performance. Many financial models use EBT as a starting point for predicting future earnings, applying anticipated tax rates to estimate net income.

FAQ

How can I calculate the EBT?

You can calculate the EBT in four steps:

  1. Compute the gross profit and other income.

  2. Determine the operating expenses.

  3. Determine the interest expense.

  4. Apply the earnings before taxes formula:

    EBT = gross profit - operating expense - interest expense + other income

What is the EBT if the EBIT is $300,000 and interest expense is $100,000?

The EBT will be $200,000 as it is the EBIT minus interest expense. You can calculate this using this formula: EBT = EBIT - interest expense.

Can earnings before tax be negative?

Yes, EBT can be negative if a company's costs and expenses exceed its revenues. This indicates that the company operated at a loss before considering taxes.

How is EBT different from EBIT?

The primary difference between EBT and EBIT lies in the consideration of interest expense. EBT includes interest expense in its calculation, while EBIT excludes both interest and tax expenses.

Wei Bin Loo
Gross profit
Revenue
$
Cost of goods sold (COGS)
$
Gross profit
$
Operating expenses
SG&A
$
Depreciation and amortization (D&A)
$
Operating expense
$
Other
Interest expense
$
Other income
$
EBT
Earnings before tax (EBT)
$
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