EBIT Formula & Example

Definition: Earnings before interest and taxes (EBIT) is used to measure the company's profitability that excludes income tax and interest expenses. It is easier to calculate EBIT by subtracting all the total operating costs from the total profits of the firm.

Formula:
Earnings before interest and tax= Sales – Cost of goods sold – Operating expenses
Or,
EBIT = Operating Revenue – Operating Expenses + Non-operating Income

Example 1:
Toms Ltd made $3.5 million in profits for the year, and spent $2.2 million on operating costs, then EBIT would be: 3.5 million - 2.2 million = $1.3 million.

Example 2:
If the net profit after taxes for BCD Ltd is $30,000 and its fixed interest charges are $5,000. The rate of income tax is 50%. Then, the EBIT = 30,000 + 30,000 + 5,000 = $65,000

Example 3:
Calculate EBIT, given the following data:
Sales Revenue $300,000
Cost of goods sold $50,000
Depreciation $8,000
Selling expenses $2,000
Non-operating income $500

Solution:
Total operating expenses = 50,000 + 8,000 + 2,000 = $60,000
EBIT = Operating Revenue – Operating Expenses + Non-operating Income = 300,000 - 60,000 + 500 = $240,500

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