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How to Calculate the Interest Expense With Net Income & EBIT

Original post by Mark Kennan of Demand Media

A company's interest expenses affect its stock outlook.

Knowing a company's earnings before interest and taxes (EBIT) as reported on a balance sheet helps investors gauge the effectiveness of the business model, unhampered by unfavorable taxes or high debt levels. Earnings alone don't indicate the performance of a company, as high interest expenses and taxes can eat away at them. In order to calculate the interest expense with net income and EBIT, you need to know the company's taxes paid, which can be found in its annual report, or 10-K SEC filing.

Step 1

Subtract the company's net income from the EBIT to find the interest and tax expense for the year. For example, if the company's net income is $15 million and the company's EBIT is $21 million, subtract $15 million from $21 million to find the company's interest and tax expense for the year, which in this case is $6 million.

Step 2

Add the various taxes the company pays during the year to find the total taxes paid. For example, if the company pays $1.3 million in state taxes, $2 million in federal taxes and $1.7 million in foreign taxes, the company's total tax expense is $5 million.

Step 3

Subtract the company's total taxes from the company's interest and tax expenses to calculate the interest expense. Completing this example, subtract $5 million in taxes from $6 million in interest and taxes to find that the interest expense equals $1 million.

                   

References

About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

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