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Jul 2, 2016 |
Financial Ratios,  |
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EBIT Operating profit

Earnings Before Interest and Tax is calculated as revenue minus expenses, excluding tax and interest. It is a measure of a company's earnings from its ordinary, continuing operations. Earnings from non-recurring, one-off operations or activities and financial result are not included. EBIT is the same as operating profit and trading profit. 

Two methods can be applied to calculate EBIT:
1. excluding only interest charges and taxes, and including non-operating revenue/costs and interest income;
2. in addition to interest charges and taxes, non-operating income and interest income are also excluded. 

Case 1 – Including non-operating income and expenses

1. Revenue (Sales)
2. Cost of Sales
3. Gross Profit (1-2)
4. Selling, general and administrative expense
5. Other operative Income and (Expense)
6. Interest Income
7. Other Income (Expense)
8. EBIT (3 -4 +/-5 +6-7)
9. Interest Expense
10. Profit (Loss) before Tax 

 

Case 2 – Only operating revenues and expenses

1. Revenue (Sales)
2. Cost of Sales
3. Gross Profit (1-2)
4. Selling, general and administrative expense
5. Other operative Income and (Expense)
6. EBIT (3 -4 +/-5)
7. Interest Income
8. Interest Expense
9. Other Non-Operating Income (Expense)
10. Profit (Loss) before Tax  

The question we ask is: which method of calculation is the most correct? What do we mean by non-operating costs/revenues? Non-operating income is the portion of company's income that originates from activities not related to its core business. It is referred to as incidental or peripheral income and is made up of earnings that do not occur on a regular basis. An example might be: interest income, dividend income, profits and losses from investments, gains or losses incurred due to foreign exchange. For a more correct and accurate financial analysis you should take account of costs and non-operating expenses as defined in table 2, and then go beyond the simple exclusion of the value of financial expenses and taxes. But beware, if you are using this methodology, you have to take this into account when calculating NOPAT and particularly when correcting the value of taxes calculated on the operating profit.