| Accountancy | |
|---|---|
 |
|
| Key concepts | |
| Accountant · Bookkeeping · Trial balance · General ledger · Debits and credits · Cost of goods sold · Double-entry system · Standard practices · Cash and accrual basis · GAAP / IFRS | |
| Financial statements | |
| Balance sheet · Income statement · Cash flow statement · Equity · Retained earnings | |
| Auditing | |
| Financial audit · GAAS · Internal audit · Sarbanes–Oxley Act · Big Four auditors | |
| Fields of accounting | |
| Cost · Financial · Forensic · Fund · Management · Tax | |
In accounting and finance, earnings before interest and taxes (EBIT) or operating income is a measure of a firm's profitability that excludes interest and income tax expenses.[1]
EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income
Operating Income = Operating Revenue – Operating Expenses[1]
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.[2] 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.[3] Profit is later obtained by subtracting interest and taxes from the result.
| Statement of Income — Example (figures in millions) |
|
| Operating Revenue | |
| Sales Revenue | $20,438 |
| Operating Expenses | |
| Cost of goods sold | $7,943 |
| Selling, general and administrative expenses | $8,172 |
| Depreciation and amortization | $960 |
| Other expenses | $138 |
| Total operating expenses | $17,213 |
| Operating income | $3,225 |
| Non-operating income | $130 |
| Earnings before Interest and Taxes (EBIT) | $3,355 |
| Net interest expense/income | $145 |
| Earnings before income taxes | $3,210 |
| Income taxes | $1,027 |
| Net Income | $2,183 |
(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)
References
- ^ a b Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0 07 251077 3 [Amazon-US | Amazon-UK]
- ^ http://www.investorwords.com/3460/operating_income.html Operating income definition
- ^ http://www.investorwords.com/1631/EBIT.html EBIT definition
See also
- Revenue
- Gross profit
- Earnings before interest, taxes, depreciation and amortization (EBITDA)
- Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Rent Costs(EBITDAR)
- Operating profit
- Net income per employee
- Earnings before tax (EBT)
- Net profit or Net income
- Financial Result
- Profit Before Interest, Depreciation & Taxes - PBDIT
- Earnings Before Depreciation, Interest and Taxes - EBDIT
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