Earnings Before Interest & Taxes = EBIT
What is Operating Income or EBIT?
Operating income also known as EBIT(earnings before interest and taxes) is the revenue generated within an accounting period minus operating expenses. Often referred to as operating profit, the operating income is the monetary value that is either positive or negative and this realizes the company’s profit or lost profit. Operating income is then deducted by taxes to determine the net income value. The formula to calculate operating income is as follows:
Operating Income = Gross Revenue – Operating Expenses
Operating Income in Business
Operating income is crucial for all persons involved in a company ranging from corporate executives to shareholders to investors to even employees. Operating income determines a company’s profitability and is often used by shareholders and investors as the key performance indicators (KPIs) when looking to invest in a company or sell off current positions. If a company continues to grow year-over-year operating income, the company looks to be in good shape and can expand or possibly look for possible synergies to increase their revenue and market reach.
EBIT in Business
Similar to operating income, EBIT is used by shareholders, investors, company executives, financial analysts, and investment bankers to determine a company’s financial position. EBIT shows the revenue generated by a company without taxes and interest interfering with this monetary figure. This is important because, some companies may be generating large amounts of revenue, but in the reported income statement the net income may be at a loss due to taxes and interest being compounded over the accounting period. By utilizing EBIT, shareholders, investors, company executives, and finance professionals can realize the revenue generated and make educated analyses on whether to keep shares, invest, or expand / reduce company size.
