For the entrepreneur who intends to create or already has a company in operation, the main objective is to guarantee a sustainable profitability of the business, that is, that the revenues exceed the costs. The Income Statement (DR) provides that information and can be supplemented to obtain a more detailed economic and financial analysis. It is in this context that we will know what EBIT is, how to calculate it, with the calculation formula and examples to help you understand.
Estimated reading time: 5 minutes
Table of Contents
Statement of Operating Income
Let's take as an example the Income Statement account that we arrived at review and simulate business strategies, as follows.
What is EBIT
EBIT, an acronym for the English name "Earnings Before Interests and Taxes" which in Portuguese means "Results Before Interest and Taxes" and therefore also known by the acronym RAJI.
For the purposes of a more detailed analysis, the Income Statement may present the following configuration.
In other words, it is the profit that results from the main activity of the company, without considering other costs or gains arising from interest received or paid, or taxes paid arising from the tax obligations of the country in which the activity is carried out.
What is the difference between EBIT and EBITDA
The difference between EBIT and EBITDA is that EBIT includes the amount of amortization and depreciation (and provisions) instead of EBITDA.
EBITDA, when not considering depreciation and amortization of assets, brings a closer view of the company's growth potential, while EBIT, when considering the loss of value of these assets, gives a more correct idea of the impact of these assets on the business.
That is, EBITDA does not consider the value of tangible assets (equipment, for example) and amortization of intangible assets (for example, brands, patents, software, customers).
So the EBITDA, as mentioned, shows the ability to generate cash flows, considering only the company's main activity, while EBIT considers the greater or lesser impact of these assets.
EBIT = EBITDA - Depreciation and Amortization
Note that EBIT = RE if there are no extraordinary operating results.
Importance of EBIT
The Earnings Before Interest and Taxes (EBIT) allows you to know whether the company makes a profit or a loss, considering the productive or operational part of the business and the “cost” inherent to the wear and tear of assets, which after some time will have to be replaced.
It is therefore a valuable indicator of profitability.
However, it must be complemented with other indicators, such as net income (NR), financial autonomy, the return on assets, the equity and sales evolution, Among others.
One of the great advantages is being able to compare the company's EBIT with other companies in the same market and analyze its evolution over time.
It also allows comparisons with companies in the same field of activity in different countries, since taxes and interest, which are different in each country, are not taken into account when calculating EBIT.
To calculate EBIT, taxes and financial expenses (interest) must be added to the net result (RL), which appears at the end of the Income Statement.
How to calculate EBIT
Calculation of EBIT, the formula:
EBIT = RL + Taxes + Interest
In the interest portion, all financial charges must be considered, such as interest payments and financial discounts.
EBIT calculation example
Putting the values of the Income Statement referred to in the Table above,
EBIT = €10.051 + €2.723 + €0 = €12.774
Advantages and Disadvantages of EBIT
Let us now see a summary of the advantages and disadvantages of knowing EBIT:
Advantages
- It allows to determine the productivity and efficiency of the business, since it does not consider the effects of the financial costs of financing.
- The evolution of EBIT over the years shows the profitability and production capacity of the business.
- Comparing the values of different companies, it provides an analysis of competitiveness, as it removes the impacts of financing costs, which in some industries, heavy and technological, are normally high. There are entities where you can get information from companies.
- It also allows comparing the performance of companies in different countries, as the effect of local factors such as taxation are not included in the indicator.
Disadvantages
- A positive EBIT can hide losses in the company, because by not considering the financial charges, if the company has taken out loans that result in high financial expenses, there may be losses, without the EBIT showing it.
- does not show the working capital needs.
- Therefore, it needs other indicators so that they can show the financial part of the company.
It is therefore important to incorporate this information into the Business Plan. It is therefore important to incorporate this information into the business plan.
