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What is EBIT?

EBIT, earnings before interest and tax, is a measure of a company's operating profit that excludes interest costs and income tax. It shows how much the core business earned before the effects of how it is financed and how it is taxed. It is also called operating profit.

EBIT isolates the performance of the business itself from its financing and tax structure. Two otherwise identical companies can report very different net income simply because one borrowed heavily and the other did not, or because one operates in a different tax jurisdiction. EBIT strips those differences out so the underlying operations can be compared.

EBIT is a step between revenue and net income. Starting from revenue, subtract operating expenses and the cost of goods sold, and the result is EBIT; then subtract interest and tax to reach net income. Because it sits above the financing line, EBIT is the figure lenders and investors use to judge whether the business generates enough operating profit to service its debt.

Example

A company has €100,000 of revenue and €70,000 of operating costs, leaving €30,000 of EBIT. It then pays €5,000 of interest and €6,000 of tax, leaving €19,000 of net income. The €30,000 EBIT shows the operating profit before financing and tax.

Questions

What is the difference between EBIT and net income?

EBIT is operating profit before interest and tax; net income is the final profit after both are subtracted. EBIT shows how the business itself performed, while net income also reflects how it is financed and taxed.

How is EBIT different from EBITDA?

EBITDA adds back depreciation and amortisation to EBIT, so it is higher for businesses with large fixed assets. EBIT is the stricter measure because it includes those non-cash costs, while EBITDA focuses on cash-generating operating performance.

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