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Short Definition

Earnings Before Interest and Taxes: 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.

The EBIT multiple is used to compare the relationship between the enterprise value (EV) and EBIT amount. The lower the ratio (EV/EBIT) the better the value to investors. An EBIT ratio below the industry average indicated that the company value has the potential to increase to match the ratio for the rest of the industry.

Long Definition

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

Operating Income = Operating Revenue – Operating Expenses

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. 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 Earnings Before Interest, Taxes, Depreciation and Amortization 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. Profit is later obtained by subtracting interest and taxes from the result.

See also

• Revenue
• Gross Margin
• Gross Profit
• EBIT
• Ebita
• Ebitda

See Related Analysis

• Ratio - EBIT Margin
• Ratio - EBITDA Margin

Source: http://en.wikipedia.org/wiki/Earnings_before_interest_and_taxes