How to Calculate EBIT?

EBITEBITEarnings before interest and tax (EBIT) refers to the company’s operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization’s profit from business operations while excluding all taxes and costs of capital.read more is the measure of a company’s profitability. EBIT calculation deducts the cost of goods sold and operating expenses.

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EBIT Formula

Formula #1 – Income Statement Formula

Earnings Before Interest and Tax  = Revenue – Cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more – Operating Expenses

Formula #2  – Using Contribution Margin

Sales – Variable Cost – Fixed Cost = EBIT

  • Sales – Variable Cost is also known Contribution MarginContribution MarginThe contribution margin is a metric that shows how much a company’s net sales contribute to fixed expenses and net profit after covering the variable expenses. As a result, we deduct the total variable expenses from the net sales when computing the contribution.read more

Step by Step Examples of EBIT Calculation

Example #1

We have a company named ABC Inc., having revenue of $4,000, COGS of $1,500, and operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more of $200.

Therefore, the EBIT is $2,300.

Example #2

We have the following data –

  • Sales $5 millionVariable Cost- 12% of Sales,Fixed cost – $200,000

Let’s calculate EBIT (Earnings Before Interest and Taxes).

Example #3

Let us assume that there is a Project is of 5 Years:

  • Sales $5 million and 7% increment Per Annum.,Contribution Margin is – 70%, 75%, 77%, 80% and 65% of Sales each year respectively,The fixed cost is $125,000.

Calculate EBIT.

Solution:

Example #4

We have the following data

  • Financial LeverageFinancial LeverageFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more – 1.4 TimesCapital (Equity and Debt) –  Equity Shares of $100 each, 34000 outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more 10% DebenturesDebenturesDebentures refer to long-term debt instruments issued by a government or corporation to meet its financial requirements. In return, investors are compensated with an interest income for being a creditor to the issuer.read more of $10 each – total 8 million numberTax Rate –  35%. Calculate EBIT

Calculation of Interest and Profit:

Financial Leverage = EBIT/EBT

Interest on Borrowings: $80 million * 10% = $8million

Therefore, the calculation of EBIT is as follows,

Financial Leverage= EBIT/EBT

  • 1.4 = EBIT/ (EBIT-Interest)1.4 (EBIT-Interest) = EBIT1.4 EBIT- ($8 milllion *1.4) = EBIT1.4 EBIT- EBIT= $11.2 million0.4 EBIT= $11.2 millionEBIT= $11.2 million/ 0.4

EBIT= $28 million.

Example #5

ABC Limited has to choose the alternative at which EBIT, and EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more will be the same for the given below alternatives:

  • Equity of $ 60 million of $ 10 each and 12% debenture of $ 40 millionEquity of $ 40 million of $ 10 each, 14% preference share capital of $ 20 million, and 12% debenture of $40 million.

And Tax= 35%. Calculate EBIT, at which EPS will be indifferent between alternatives.

Alternative 1:

EPS(Alt-1) = (EBIT-Interest) (1-tax rate) / No. of Equity Shares

  • = (EBIT- 12%* $40 million) (1-0.35)/6 million= (EBIT- $4.8 million)( 0.65)/6 million

Alternative 2:

EPS(Alt-2) = (EBIT-Interest) (1-tax rate)- (0.14* $20 million) / No. of Equity Shares

  • = (EBIT- 12%* $40 million) (1-0.35) -($2.8 million)/4.0 million= (EBIT- $4.8 million) (0.65) -($2.8 million)/4.0 million

Let’s compare EPS at alternative 1 with alternative 2

  • EPS(Alt-1) = EPS(Alt-2)(EBIT- $4.8 million)( 0.65)/6 million = (EBIT- $4.8 million) (0.65) -($2.8 million)/4.0 million

Solving this equation for EBIT, we get

EBIT= $17.72308 million

Example #6

  • Market Value of the Firm: $ 25 millionCost of Equity(Ke)= 21%15% Debt value = $ 5.0 million at market valueTax Rate = 30%.

For the calculation of EBIT, we will first calculate the net income as follows,

Value of the Firm= Market value of Equity + Market value of Debt

  • $25 million = Net Income/ Ke + $ 5.0 millionNet Income= ($ 25 million -$ 5.0 million) * 21%Net Income= $ 4.2 million

EBIT = Net income attributable to shareholders/ (1- Tax Rate)

  • = $4.2 million/ (1-0.3)= $ 4.2 million/0.7= $ 6.0 million

Example #7

  • Production level of Company – 10000 unitsContribution per unit = $30 per unitOperating Leverage = 6Combined Leverage = 24Tax Rate = 30%.

Calculate EBIT

Financial Leverage

Combined Leverage = Operating LeverageOperating LeverageOperating Leverage is an accounting metric that helps the analyst in analyzing how a company’s operations are related to the company’s revenues. The ratio gives details about how much of a revenue increase will the company have with a specific percentage of sales increase – which puts the predictability of sales into the forefront.read more * Financial Leverage

  • 24 = 6*Financial LeverageFinancial Leverage = 4

Total Contribution= $30 *10000 units= $300,000

Operating Leverage = Contribution/ EBIT

  • 6  = $300,000 / EBITEBIT = $300,000 / 6EBIT = $50,000

Example #8

We are provided with the following dataset

  • Operating Leverage- 14Combined Leverage – 28Fixed Cost – (Excluding Interest) – $2.04 millionSales- $ 30 million12% Debentures- $21.25 millionTax Rate = 30%.

Combined Leverage = Operating Leverage * Financial Leverage

  • 28 = 14* Financial LeverageFinancial Leverage= 2

Contribution

Operating Leverage = Contribution /EBIT

  • 14= Contribution/ Contribution- Fixed CostFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more14= Contribution/ Contribution- $2.04 million14 Contribution – $28.56 million = ContributionContribution= $ 28.56 million/13Contribution= 2.196923 million

It is a step-by-step guide to EBIT Calculation with the help of simple to advanced examples. You may learn more about accounting from the following articles –

  • EBIT Margin FormulaFormula of EBITDAEBITDAREBIT vs EBITDA