What is EBIT? Meaning, Definition and Calculation

What is EBIT, how is it calculated and why is it important in the financial analysis of a company? Among the profitability indicators of a company there is this measure that is used to quantify the ability of a company to make a profit.

Often highlighted in the presentation of quarterly company accounts and in the publication of balance sheets, EBIT indicates the operating income of a company before the deduction of interest and taxes.

For investors and financial operators, especially those dealing with listed companies, it is useful to know how to read this indicator. In fact, EBIT allows you to compare different companies more fairly, regardless of their level of indebtedness or tax regime.

Below is a clear guide on what EBIT is and how to calculate it, specifying the differences with other similar measures, such as EBITDA.

What is EBIT: meaning and definition

EBIT, also called operating income, literally means Earnings before Interest & Tax, that is, the company’s result before financial charges (taxes and interest).

In simpler words, its definition is:

operating result before the deduction of financial charges and taxes. It expresses the profitability deriving exclusively from the company’s characteristic activity, excluding the impact of the financial structure and taxation.

By definition, EBIT does not take into account either taxes or interest paid by the company (it does not subtract them) and in doing so it focuses exclusively on the ability of the company to generate profits from operations, ignoring variables such as the tax burden and the capital structure.

Calculating EBIT

There are several ways to calculate EBIT and generally you start by subtracting operating costs from total revenue, including the cost of selling goods.

In simple terms, it is about obtaining the value of production without operating costs, understood as: personnel costs; costs of materials, rent costs and depreciation.

The formulas for obtaining EBIT are as follows:

EBIT = Revenue − Operating Costs
(where operating costs include the cost of goods sold, general and administrative expenses, but exclude interest and taxes).

EBIT = Net Profit + Taxes + Interest Expenses
(in this formula we consider the profit, given by the revenue minus the costs, and taxes with interest).

EBIT: some calculation examples

To further simplify the understanding of EBIT, we can list some calculation examples.

In general, let’s imagine a company with the following financial data:

• Revenues: €1,000,000;
• Operating costs (excluding interest and taxes): €600,000;
• Depreciation and amortization: €50,000;

Then:
EBIT=1,000,000−600,000−50,000=350,000

EBIT indicates that the company has an operating profit of €350,000 before considering (and therefore subtracting) interest on debt and taxes.

To give some concrete examples, Ferrari - a well-known car company - presented accounts for the third quarter of 2024 with an EBIT of 467 million euros. This figure therefore indicates that in the period in question, the company’s sales revenues minus operating costs were equal to 467 million, to be understood as the ability to generate profit without excluding the tax burden and the capital structure.

Banca Intesa San Paolo, in the 2024 financial statement, highlighted an EBIT of 15,537 million euros. The value therefore refers to revenues minus costs before calculating interest and taxes. The institute indicated an increase in the indicator on 2023, to underline the better performance in generating profit.

How to use and why is EBIT important

What is EBIT used for and why is it used by analysts? To answer this question, it is worth noting that the so-called earnings before interest and taxes is also used to obtain the Return on Investment (ROI) through the following formula:

|ROI = EBIT / Net Invested Capital|

In addition to being useful for the analysis of a company’s balance sheet, EBIT is also considered a measure of the operating result of the same through the examination of cash flows. The fact of ignoring variables such as taxes allows EBIT to be particularly suitable in various areas.

For example, if an investor is thinking of buying a company, in his calculations the capital structure will certainly be less important than the profit potential and this is where EBIT comes into play.

Following the same reasoning, the earnings before interest and taxes (EBIT) can also have a comparative use. Let’s take the example of an investor who wants to compare two companies in the same industry that operate under two different tax regimes and have different strategies for their financing.

In a comparative perspective, considering taxes, financial charges and expenses would distract from the main question: how do these companies generate profits from their operations? This is what EBIT is for and why its use can be very important.

Difference between EBIT, EBITDA and other indicators

When reading the economic accounts of a company, usually published under the name Quarterly, the list of indicators is extensive.

The measures presented in the balance sheet differ, even if they have similar acronyms or names. The first important difference is between EBIT and EBITDA. The latter is Earnings Before Interest, Taxes, Depreciation, and Amortization and means operating result before interest, taxes, depreciation and amortization.

EBITDA excludes depreciation and amortization, so it shows the company’s ability to generate operating income before considering the depreciation of assets. EBIT instead includes them (subtracts them) offering a more realistic view of the operating result.

Sometimes you can also notice the balance sheet item EBT (Earnings Before Taxes), referring to the profit before taxes, when not only taxes are subtracted.

Net profit is another indicator with substantial differences from EBIT and EBITDA. In fact, it represents the final profit, after all expenses and taxes.

Original article published on Money.it Italy. Original title: Cos’è l’EBIT? Significato, definizione e calcolo