What Is EBIT In Simple Terms And How It’s Calculated?

EBIT is earnings (or profit) before interest and taxes.

EBIT is earnings before interest and taxes. To calculate EBIT in simple terms, start with profit before tax, deduct interest income, and add-back interest expense. These amounts are easily found on a business’s profit and loss page, which is included in the financial statements.

It’s important to highlight that the interest referred to in the acronym EBIT, is both interest income and interest expense.

With that said, how is EBIT calculated in simple terms?

How is EBIT calculated in simple terms?

The best way to calculate EBIT, is to look at a company’s profit and loss, which will be a page included in its financial statements.

On the profit and loss page, you should be able to find the profit before tax number, which is your starting point.

Then identify any interest income on the profit and loss, and deduct this amount from the profit before tax amount.

Finally, identify any interest expense on the profit and loss, and add this amount back to the profit before tax figure.

This adjusted profit before tax figure will be EBIT.

What is EBIT in simple terms?

Another way to approach calculating EBIT, is to start with total sales, and then deduct cost of goods sold, which gives you gross profit, and then deduct all business expenses (except interest paid) from this number, add back any other income the business has (except for interest income), and this gives you EBIT too.

Now you understand how to calculate EBIT, you may wonder why EBIT is important and what it’s used for, if you do, please read this article What Is EBIT Used For (Why Is It Important?), where you can also watch my video on this too.

If you have any questions on this topic about a business, or on any other aspect about a business (or even about the process involved in buying a business), please drop a comment below.

And always remember that no question is a stupid question, if you don’t know it, you don’t know it.