Good day everyone.

I am going to discuss, earnings before interest and taxes or also known as EBIT or
Ebit. In this report, we’ll be able to know the definition of EBIT, Formula used to know the EBIT, and
some real life examples on how to solve for EBIT.

First, what is EBit?

EBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income
statement before net income. If EBIT is unsatisfactory, the company will then need to increase its
revenues or decrease their expenses or both to improve its performance. EBIT is also referred to as
operating earnings, operating profit, and profit before interest and taxes.

EBIT is also sometimes referred to as operating income because it is found by deducting all
operating expenses (production and non-production costs) from sales revenue. However, there are
cases when operating income can differ from EBIT. The key difference between EBIT and operating
income is that EBIT includes non-operating income, non-operating expenses, and other income.

EBIT is used to analyze the performance of a company's core operations without the costs of the
capital structure and tax expenses impacting profit. This metric strips out the impact of interest and
taxes, showing an investor or manager how a company is performing excluding the impacts of the
balance sheet's composition. In terms of EBIT, it doesn't matter if a company is overloaded with debt or
has no loans at all. EBIT will be the same either way.

Dividing EBIT by sales revenue shows you the operating margin, expressed as a percentage (e.g.,
15% operating margin). The margin can be compared to the firm’s past operating margins, the firm’s
current net profit margin and gross margin, or to the margins of other, similar firms operating in the
same industry.

Formula and Calculation for EBIT

There are two ways on how to solve for EBIT: First is by deducting the cost of goods sold and
operating expenses to the revenue and the second one is by add interest and taxes to the net
income.
EBIT = Revenue − COGS − Operating Expenses

Or

EBIT = Net Income + Interest + Taxes

where:

COGS = Cost of goods sold

The EBIT calculation takes a company's cost of manufacturing including raw materials and total
operating expenses, which include employee wages. These items and then subtracted from revenue.
The steps are outlined below:

1. Take the value for revenue or sales from the top of the income statement.
2. Subtract the cost of goods sold from revenue or sales, which gives you gross profit.
3. Subtract the operating expenses from the gross profit figure to achieve EBIT.
Examples:

Below is Procter & Gamble Co's income statement from the year ending June 30, 2016 (we’ll just
assume that all figures stated below are in millions of PHP) observe the following and we’ll try to
solve for Ebit in the next slide.

Net sales 65,299,000

Cost of products sold 32,909,000

Gross profit 32,390,000

Selling, general and administrative expense 18,949,000

Operating income 13,441,000

Interest expense 579,000

Interest income 182,000

Other non-operating income, net 325,000

Earnings from continuing operations before income taxes 13,369,000

Income taxes on continuing operations 3,342,000

Net earnings (loss) from discontinued operations 577,000

Net earnings 10,604,000

Less: net earnings attributable to non-controlling interests 96,000

Net earnings attributable to Procter & Gamble 10,508,000

To calculate EBIT, we subtract the cost of goods sold and the Selling, General &Administrative
expense from the net sales. However, P&G had other types of income that can be included in the EBIT
calculation. P&G had non-operating income and interest income, and in this case, we calculate EBIT as
follows:

EBIT = NS − COGS − SG&A + NOI + II

EBIT = ₱65,299 − ₱32,909 − ₱18,949 + ₱325 + ₱182 = ₱13,948

where:

NS = Net sales

SG&A = Selling, general, and administrative expenses

 NOI = Non-operating income

II = Interest income

Similarly, we can make an argument for excluding interest income and other non-operating
income from the equation. These considerations are to some extent subjective, but we should apply
consistent criteria to all companies being compared. For some companies, the amount of interest
income they report might be negligible, and it can be omitted. However, other companies, such as
banks, generate a substantial amount in interest income from the investments they hold in bonds or
debt instruments.

Another way to calculate P&G's fiscal 2015 EBIT is to work from the bottom up, beginning with
net earnings. We ignore non-controlling interests, as we are only concerned with the company's
operations and subtract net earnings from discontinued operations for the same reason. We then add
income taxes and interest expense back in to obtain the same EBIT we did via the top-down method:

EBIT = NE − NEDO + IT + IE

Therefore, EBIT = ₱10,604 − ₱577 + ₱3,342 + ₱579 = ₱13,948

In this formula, we’ve come up with a total of 13,948 which is just the same ebit that we got from the
first computation.

where:

NE = Net earnings

NEDO = Net earnings from discontinued operations

IT = Income taxes

IE = Interest expense

UNDERSTANDING EARNINGS BEFORE INTEREST AND TAXES (EBIT)

Earnings before interest and taxes measures the profit a company generates from its operations
making it synonymous with operating profit. By ignoring taxes and interest expense, EBIT focuses solely
on a company's ability to generate earnings from operations, ignoring variables such as the tax burden
and capital structure. EBIT is an especially useful metric because it helps to identify a company's ability
to generate enough earnings to be profitable, pay down debt, and fund ongoing operations.