Glossary
EBIT
Earnings before interest and taxes: profit from operations before financing costs and income tax.
On this page
EBIT stands for earnings before interest and taxes. It measures the profit a company's core business produces before two items that depend on choices outside day-to-day operations: how the company is financed (interest) and where and how it is taxed. That makes it useful for comparing businesses that carry very different amounts of debt.
The top-down route is close to Operating income, and many people use the two terms interchangeably. They can differ when a company has non-operating items, such as investment gains or one-off legal settlements, that sit below operating income but above interest and tax.
Worked example
How it is used
- EBIT margin, EBIT divided by revenue, compares operating profitability across peers.
- Interest coverage ratio, EBIT divided by interest expense, shows how comfortably a company can pay its lenders. B above covers its interest 2.5 times.
- Valuation multiples such as enterprise value to EBIT compare companies independent of their capital structure; see Enterprise value (EV).
Limits
Unlike EBITDA, EBIT does charge the business for Depreciation and amortization, which makes it a better gauge for companies that must keep reinvesting in equipment. But it is not a GAAP-defined line, so companies and data providers calculate it differently, and it ignores the real cost of debt and taxes that shareholders eventually bear.