EBIT

Examples of EBIT in the following topics:

• Times Interest Earned Ratio

  • Times Interest Earned Ratio = (EBIT or EBITDA) / (Required Interest Payments), and is indicative of a company's financial strength.
  • Times Interest Earned Ratio = Earnings before Interest and Taxes (EBIT) / Interest Expense.
  • Analysts will sometimes use EBITDA instead of EBIT when calculating the Times Interest Earned Ratio.
  • EBITDA can be calculated by adding back Depreciation and Amortization expenses to EBIT.
  • If Company A's EBIT is 750,000 and its required interest payments are 150,000, itsTimes Interest Earned Ratio would be 5.

• Times-Interest-Earned Ratio

  • Times Interest Earned ratio (EBIT or EBITDA divided by total interest payable) measures a company's ability to honor its debt payments.
  • It may be calculated as either EBIT or EBITDA, divided by the total interest payable.
  • EBIT = Earnings Before Interest and Taxes, also called operating profit or operating income.
  • EBIT is a measure of a firm's profit that excludes interest and income tax expenses.
  • When a firm does not have non-operating income, then operating income is sometimes used as a synonym for EBIT and operating profit.

• Basic Earning Power (BEP) Ratio

  • The Basic Earning Power ratio (BEP) is Earnings Before Interest and Taxes (EBIT) divided by Total Assets.
  • The BEP ratio is simply EBIT divided by total assets .
  • The distinction between EBIT and Operating Income is non-operating income.
  • However, in most cases, EBIT is relatively close to Operating Income.
  • The advantage of using EBIT, and thus BEP, is that it allows for more accurate comparisons of companies.

• Leverage Models

  • Sales $400,000 Less Variable Costs (330,000) Less Fixed Costs (30,000) EBIT = $40,000 DFL = $40,000 / $40,000 - $6,000 - ($2,000 /0.80) DFL = 1.27
  • The DFL is calculated in relation to earnings before interest and taxes (EBIT).
  • We discount the amount of preferred dividends payed by the tax deductions brought about by those dividends and subtract the result and the cost of interest on debt from EBIT.
  • We then divide EBIT by the result of this calculation.

• Combining Operating Leverage and Financial Leverage

  • Earnings can be measured in terms of EBIT, earnings before interest and taxes, or EPS, earnings per share.
  • While EBIT can be determined by referencing a company's income statement, we can determine earnings per share by dividing the company's net income by it's average price of common shares.

• Debt Utilization Ratios

  • It may be calculated as either EBIT or EBITDA, divided by the total interest payable.
  • EBIT is earnings before interest and taxes, and EBITDA is earnings before interest, taxes, depreciation, and amortization.

• Net Income

  • Net sales (revenue) – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense = Net income (EAT)

• Free Cash Flow

  • Free cash flows = EBIT x (1 - Tax rate) + Depreciation & Amortization - Changes in Working Capital - Capital Expenditure

• Financial Management Before and During Bankruptcy

• Sample Evaluation

  • BEP Ratio = EBIT / Total Assets = 1,810/13,840 = 0.311