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In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all expenses except interest and income tax expenses. It is the difference between operating revenues and operating expenses. When a firm does not have non-operating income, operating income is sometimes used as a synonym for EBIT and operating profit.
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. Net income is later obtained by subtracting interest and taxes from the result.
|Cost of goods sold||$7,943|
|Selling, general and administrative expenses||$8,172|
|Depreciation and amortization||$960|
|Total operating expenses||$9,270|
|Earnings before Interest and taxes (EBIT)||$3,355|
|Income before interest expense (IBIE)||$3,400|
|Earnings before income taxes (EBT)||$3,210|
Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid for taxes. EBT includes the money paid for interest. Thus, it can be calculated by subtracting the interest from EBIT (earnings before interest and taxes).