Earnings before interest and taxes
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In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that excludes interest and income tax expenses. Operating income is the difference between operating revenues and operating expenses. When a firm has zero non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.
Operating income = Revenue – Operating expenses
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.
(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)
- Earnings before depreciation, interest, and taxes (EBDIT)
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR)
- Financial result
- Gross profit
- Net income per employee
- Net profit or Net income
- Operating profit
- Profit before interest, depreciation, and taxes (PBDIT)
- Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0-07-251077-3
- http://www.investorwords.com/3460/operating_income.html Operating income definition
- http://www.investorwords.com/1631/EBIT.html EBIT definition