Earnings Before Interest and Taxes
Earnings Before Interest and Taxes, or EBIT, is the amount of money a company makes after deducting all expenses excluding interest and taxes.
<math>EBIT=Revenue - COGS - Operating\ Expenses</math> or
Earnings Before Interest and Taxes is expressed in dollars and is the amount of profit you have for each $1 in sales after deducting all expenses other than interest and taxes. It is also often referred to as operating profit.
Operating income is a good metric to use to see how well the company earns money from doing what it is in business to do, its operations. For instance, a retailer is meant to sell stuff and get the vast majority of its profit by doing so. If it is losing money at the operating level and is only positive at a net income level due to various non-operating items such as gains on sale of investments, then you need to look further into what is going on before investing.
Generally Accepted Accounting Practices (GAAP) requires certain items to be deducted from revenue and gross profit. To a large extent, these are not discretionary. Therefore, it is somewhat more difficult for management to manipulate the items above the operating profit line, though not impossible (depreciation and amortization come to mind). Items that come below this line, non-operating income and expenses, are more easily manipulated as they are much more discretionary about the type and timing.
Because of the above two points, some investors don't use net income, but instead use NOPAT (net operating profit after taxes) or NOI (net operating income). That is, they start with operating profit or EBIT, and then subtract out taxes. Often, a flat tax rate of 35% (typical for U.S. firms) is used.
Recent Mentions on Fool.com
- Tax Fraud -- Crimes Versus Negligence
- IRS Tax Brackets 2015: What You Need to Know
- Nordstrom Inc. Rewards Its Shareholders
- A 401(k) Loan Might Make Sense, but it Should Only Be Your Last Resort
- Financial Guru Suze Orman Is Completely Wrong About This Retirement Myth
- CalAmp Corp. Drives Another Strong Quarter