EBIT is an acronym that stands for “earnings before interest and taxes.” You can calculate your EBIT by taking your total revenue and subtracting all costs of your business except for the interest expenses and tax expenses. You can also calculate your EBIT by adding interest expenses and tax expenses to your net income. Your EBIT should be equal to or higher than your net income, because you include additional expenses when calculating net income. EBIT is an alternative way to measure how your company is doing. By not including the cost of interest and taxes, you only look at the expenses you can control. This gives you better information about your profits, because EBIT only reports what you can manage. Because interest charges and taxes are imposed on your business, they don’t reflect your performance in operating your company. You should use EBIT instead of net income when you want to check how well you’re controlling costs or how efficiently your company is running. A low EBIT means your company isn’t making a large profit. You can improve your EBIT by increasing revenue, spending less to buy or make inventory, or spending less on business operations, such as marketing, sales, or human resources. EBIT is not required to be included in your financial statements, so the calculation is most useful for analysis within your company. If you want to get a sense of how your company is doing, consider limiting outside variables that impact your profit by looking at your EBIT.
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.