What Does
Earnings Before Interest And Taxes Mean?
Earnings before interest and taxes (EBIT) is a term that is not defined by accounting standards, but is often referred to when assessing a company’s operating performance. EBIT is an acronym that stands for earnings from operations before deducting interest from long term debt and taxes. The difference between EBIT and EBITDA is the deduction of depreciation and amortization on tangible and intangible assets in the EBIT calculation. Because depreciation usually forms part of normal operations, EBIT is usually a good proxy for operating earnings and is the best indicator of a company’s profitability.
Divestopedia Explains Earnings Before Interest And Taxes
EBIT allows potential acquirers to understand the true business costs of running a company. It is used to analyze the operating profitability of a company as a singular measure of performance without taking into account its cost of capital or tax implications. Lower EBIT indicates lower profitability.
EBIT is important in the comparison of companies that have different capital structures across a single industry. It indicates whether lower margins are due to the competitive nature of the industry or due to issues within the company. To smooth out seasonal fluctuations, trailing twelve months (TTM) EBIT gives a better picture of past operating performance and can serve as a good proxy to the running rate operating performance. EBIT is also closely monitored by creditors as it loosely represents the amount of pre-tax cash the company generates to pay down debt.