Earnings before interest and taxes

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In financial and business accounting, earnings before interest and taxes (EBIT) is a measure of a firm's profitability that excludes interest and income tax expenses.^[1]

EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income

Operating Income = Operating Revenue – Operating Expenses^[2]

Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.^[3] This is true if the firm has no non-operating income.

A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by EBITDA and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues.^[4] Profit is later obtained by subtracting interest and taxes from the result.

Statement of Income — Example (figures in millions)
Operating Revenues
Net Sales	$20,438
Operating Expenses
Cost of goods sold	$7,943
Selling, general and administrative expenses	$8,172
Depreciation and amortization	$960
Other expenses	$138
Total operating expenses	$17,213
Operating income	$3,225
Nonoperating income	$130
Earnings before interest and income taxes (EBIT)	$3,355
Net interest expense	$145
Earnings before income taxes	$3,210
Income taxes	$1,027
Net income	$2,183

(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)

[edit] References

^ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0 07 251077 3
^ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.
^ http://www.investorwords.com/3460/operating_income.html Operating income definition
^ http://www.investorwords.com/1631/EBIT.html EBIT definition