EBIT is a key figure used in business management to describe the operating profit of a company over a period of time. How is EBIT calculated?
What’s it all about?
- What does EBIT mean?
- How is EBIT calculated?
- What is the EBIT margin?
- What is the difference between EBIT and EBITDA?
What does EBIT mean?
EBIT (Earnings Before Interest and Taxes) is a key figure used in business management to describe the operating profit of a company over a defined period before the deduction of interest and taxes. This enables comparison with other companies, regardless of different forms of financing and tax systems. In the income statement, the EBIT is shown as a subtotal. 👉 Together with the balance sheet, the income statement forms a company’s Annual Financial Statement.
How is EBIT calculated?
There are two methods of calculating EBIT:
🧮 Aggregate cost method: In the calculation, sales revenues, the stock of finished products and all other operating income are added together. Personnel expenses, amortisation and other operating expenses are then deducted from the total to find the aggregate cost.
🧮 Cost of sales method: Calculating the cost of sales involves deducting the manufacturing, sales and administration costs from the total income for a period. Other operating income or amortisation are added or subtracted.
What is the EBIT margin?
The EBIT margin is the profit margin of a company; it describes the relationship between EBIT and a company’s total income. As an operating margin, it compares the operating costs with the generated sales. This means that the EBIT margin is a key figure for recording a company’s profitability and operational efficiency.
To calculate the EBIT margin, the EBIT is divided by the sales revenue and multiplied by 100. The EBIT margin is always given as a percentage.
What is the difference between EBIT and EBITDA?
Another key figure besides EBIT is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation). In contrast to EBIT, EBITDA calculates the profit not only before the deduction of taxes and interest but also before amortisation on property, plant and equipment and intangible assets. Similar to the EBIT margin, an EBITDA margin can also be calculated to illustrate the relationship between sales and EBITDA.