EBIT of a company. What it is and how it is calculated.

EBIT is the acronym used to determine the result of a company's fiscal year before interest and taxes. In some international accounting standards it has also been called BAIT or Operating Income.

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What is EBIT?

EBIT is the calculation made in a company's income statement to determine the gross profit from sales, from which operating expenses, i.e. marketing and administrative expenses, depreciation and amortization, are deducted. 

Another way to represent EBIT is to consider the company's operating income before interest and taxes. 

In companies located in countries with high inflationary contexts and/or fiscal instability, EBIT can be decisive for the continuity of the business, as it represents the cushion on which the company will be able to sustain financial and fiscal expenses, and ultimately obtain an economic benefit.

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Why is it important in the company?

EBIT is a measure of a company's earnings from its core business, net of wear and tear on property, plant and equipment and intangible assets. 

It is directly related to activity costs, for example: material and input costs, direct labor costs and indirect manufacturing costs. 

But it is also related to indirect expenses, such as those associated with the marketing of goods and services, and those related to administrative expenses necessary for the operation of the company.

EBIT includes the accounting recording of the impairment of property, plant and equipment, such as real estate, vehicles, vessels, aircraft, machinery, computer equipment, specialized equipment, furniture, fixtures and fittings, among others. 

It also includes the accounting recording of the impairment of intangible assets, such as trademarks, manufacturing patents, industrial property registrations, and other similar items.

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Related content

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How to calculate EBIT?

To calculate EBIT, it is essential to view the company's complete Income Statement and analyze the information it provides for subsequent analysis and interpretation.

Analysis and Interpretation

EBIT comprises the profit the company earns on sales of its core business, net of cost of sales and also of expenses related to these sales. But depreciation and amortization should also be considered as deductions, since the latter can provide information on the company's ability to continue operating in the market or jurisdiction in which it operates. 

Depreciation consists of the recording of the loss in value of fixed assets, due to natural wear and tear over time. For example: real estate 50 years, vehicles 5 years, computer equipment 3 years, depending on the applicable legislation.

Amortization consists of recording the loss in value of intangible and deferred assets, for example: trademarks, manufacturing patents, industrial property registrations, and other similar assets. The loss of value may occur for reasons unrelated to the passage of time, but related to a greater extent to commercial, reputational and cyclical changes. 

A negative EBIT probably indicates that the company is facing structural problems in its main operating costs and in expenses directly related to the activity, but it may also represent a company that has large structures of obsolete tangible fixed assets or problems to introduce its products in the market, due to reputational damage, litigation on trademarks and patents, or other cyclical situations. 

Every economically healthy company must have a positive EBIT and, if possible, with a good margin that allows it to meet other expenses without affecting the final result of the year or the company's annual profitability. 

In conclusion, EBIT is the second internal and external warning regarding the situation of the company's main operations, and determines whether the company is profitable or not from the point of view of the object of economic activity. 

When the company's situation is critical with respect to its tangible and/or intangible fixed assets, this result represents a warning to third parties, who should consider continuing to do business or canceling the commercial relations maintained with the company.

Differences with EBITDA

The following are the three most important differences between EBIT and EBITDA as indicators of operating profitability, analyzing the company's income statement as a whole.

The ideal is to analyze these values horizontally for the company over time, that is, for at least five consecutive fiscal years. These values can also be compared with those of other companies in the sector and in jurisdictions with similar levels of activity.

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