FinAnalysis: EBIT

EBIT - earnings before interest and tax

Meaning: amount of money left in a firm after paying operating and admin expenses, but before paying interest and income tax. Basically this is how much money firm is left with to pay their debt.

- EBIT = Operating Revenue – Operating Expenses + Non-operating Income

Definitions:

1. (EBIT) is a measure of a firm's profitability that excludes interest and income tax expenses - Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.

2. operating and nonoperating profit before the deduction of interest and income taxes. - thefreedictionary.com

3. An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating income" - investopedia.com

EBIT/Interest

Implication:
- measure of long-term solvency, times interest earned ratio.
- How well a company have its interest covered.
eg. if company X's EBIT is $20,000 and interest expense is $10,000 the ratio is 2. Meaning they are capable of paying interest for their debt.
- with a volatile company like movie industry, ratio of 2 may not be adequate.


"Long-term Solvency" - firms long-run ability to meet obligations, or financial leverage.