Core operating profitability
EBIT isolates operating performance by excluding financing and tax-related costs.
The EBIT calculation process
1
Start with revenue
Begin with total revenue or net sales.
2
Subtract operating expenses
Deduct cost of goods sold (COGS), selling, general & administrative expenses (SG&A), and other operating costs.
3
Ignore interest and taxes
Do not include interest expenses or tax charges in the calculation.
4
EBIT Formula:
EBIT = Revenue – Operating Expenses (excluding interest and taxes)
Or
EBIT = Net Income + Interest + Taxes
Impact on business performance
Understanding EBIT helps businesses and investors:
- Gauge the profitability of core operations.
- Evaluate management efficiency.
- Benchmark performance independent of debt or tax conditions.
- Identify trends in operational profitability over time.
However, relying solely on EBIT can be misleading if non-operating income or large one-time expenses distort the operating picture.
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Real-world examples
Case study: EBIT as a valuation anchor in airline industry
Airlines operate with high fixed costs and often carry significant debt. Using EBIT instead of net income allows analysts to compare operating efficiency without distortions from interest payments. For example, comparing EBIT across airlines like Delta, United, and IndiGo reveals who runs the most efficient operations, regardless of their financing models.
Frequently asked questions about EBIT?
EBITDA adds back depreciation and amortization to EBIT. EBIT reflects operating earnings after accounting for asset wear and tear; EBITDA excludes those non-cash costs.
Interest and taxes vary by company and region. Excluding them gives a purer picture of operating performance.
Yes. A negative EBIT indicates the company is not generating profit from its core operations, which may signal operational inefficiency or early-stage losses.