Also known as profit before interest and taxes, earnings before interest and taxes (EBIT) is the revenue generated by a business less any type of expenses, but before allowing for taxes and any type of interest payments the business must make. In some quarters, EBIT may also be referred to as operating profit or operating income. Identifying the current status of earnings before interest and taxes is often a good way to assess the financial health of a business, and also compare that level of success to direct competitors.
Key to the process of determining earnings before interest and taxes is the identification of all revenue that is generated by the business. This normally focuses on what is known as collected revenue, or that portion of generated revenue that the business has actually received. For most companies, the majority of the revenue considered in the calculations comes from the sales of goods and services to consumers that have been invoiced and payments tendered by consumers to settle those invoices.
Along with revenue, calculating the earnings before interest and taxes also involves identifying the amount of operational expenses incurred for the same period under consideration. By subtracting this amount from the total revenue for the period, it is possible to get an idea of how well the company is doing. Ideally, the amount of collected revenue is more than the operational expenses, indicating the business is likely to generate a profit even after taxes are paid. Many businesses compare the EBIT from one period to the next to determine if the profits of the company are experiencing some sort of downturn or if profits are actually improving from one period to the next. Identifying factors that contributed to that increase or decrease can help owners and managers to plan for upcoming periods and implement procedures or policy changes that either aid in continuing the upward trend or minimizing losses in the months to come.
Determining the earnings before interest and taxes is also helpful when making comparisons between competing business entities within a given industry. Analysts can compare the positions of each company under consideration and determine which ones may be losing ground to competitors and which ones appear to be capturing a larger market share. This in turn can aid in understanding developing trends within the marketplace, allowing investors to make more informed decisions regarding which company is worthy of investment, and which ones should be avoided for the time being.
