EBIT stands for “Earnings before interest and tax”; this term is a part of income statement indicates the earning including interest amount and tax. The other common term used for EBIT are operating profit and operating earnings.
Let me explain the terms in EBIT in detail
Earning – Earning is the profit of organization
Interest – The surplus amount which organization pay on debt
Tax – Amount which organization pays to Government on sales or services.
Calculation of EBIT
EBIT can be determined by using this formula (total sales – cost of goods sold – operating expenses). Total sales is the revenue received after selling the product or services
Costs of goods sold are the purchasing cost of the raw material and direct labor used for the production of goods.
An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an on-going cost for running a product, business, or system.
– Cost of Goods Sold
– Operating Expense
EBIT (Earnings before Interest and Tax)
Advantages and Disadvantages of EBIT
An advantage of EBIT that it is easy to calculate and understand on the otherhand disadvantage is that it does not include the cost of capital.