What is EBIT? How to Calculate EBIT?
Earnings before interest and tax (EBIT) is the net income of a company before the tax expense and interest expense are taken off.
EBIT is equivalent to Operating Income for companies that do not have non-operating income. In such cases,
EBIT = Revenue – Operating Expense (OPEX)
EBIT is a relevant measure for investors who wish to be neutral to the effect of the interest expense (capital structure) and the income taxes. Some scenarios where this is desirable is for an investor who is contemplating an acquisition of the company and then recapitalizing it.
In other cases, EBIT provides a cleaner way to compare operational efficiency of two companies as the varying tax rates and interest expense can distort the picture.
Some value investors are partial to using EBIT in place of Net Income. Although this is a cleaner picture of company earnings power, it is still confounded by depreciation, amortization and other non cash charges. EBITDA, a related metric, removes depreciation and amortization values from the EBIT and this mitigates many of the distortion problems.
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