What is EBIT?
EBIT, earnings before interest and tax, is the profit a business makes from its trading activities before loan interest and tax are taken off.
What EBIT means
EBIT strips out the two costs that depend on how a business is financed and where it is taxed, leaving the profit generated by its operations. It is calculated as:
EBIT = net profit + interest + tax
or, working down the profit and loss account, revenue minus cost of sales minus operating expenses (including depreciation and amortisation). For most small businesses, EBIT and operating profit are the same figure. They differ only when there is non-operating income, such as a one-off gain on selling a van or investment income, which EBIT includes and operating profit excludes.
Example
| Line | Amount |
|---|---|
| Revenue | £420,000 |
| Cost of sales | (£210,000) |
| Overheads, including £12,000 depreciation | (£150,000) |
| EBIT | £60,000 |
| Loan interest | (£5,000) |
| Profit before tax | £55,000 |
Corporation Tax on £55,000 is calculated with marginal relief, because the profit sits between £50,000 and £250,000. EBIT is the £60,000 before any of that.
Why it matters for your business
EBIT lets you compare two businesses with different borrowing. A company funded by a bank loan and one funded by its owners can be judged on the same footing. Lenders use it for the interest cover ratio: EBIT divided by interest. In the example, £60,000 ÷ £5,000 gives cover of 12 times, which a bank would see as comfortable.
Because it keeps depreciation as a cost, EBIT recognises that equipment wears out and has to be replaced. For businesses with vans, kitchens or machinery, it gives a more realistic view than EBITDA.
EBIT vs EBITDA
EBITDA adds back depreciation and amortisation. In the example, EBITDA would be £72,000. The difference between the two is the cost of using up assets, which is real even though no cash leaves the bank that year.
How to improve EBIT
EBIT rises when you raise prices or volumes, cut direct costs or control overheads; financing and tax decisions do not affect it. That makes it a fair measure of management performance. For a small business, monthly EBIT from management accounts, compared with the same month last year, quickly shows whether trading is improving once seasonal swings are taken into account.
Common questions
Usually, for small businesses. The difference is that EBIT can include non-operating income such as investment income or a one-off gain, while operating profit covers trading only. Your accountant can show both in your management accounts. The two will match unless there was unusual income.
Because it shows the profit available to pay interest. Dividing EBIT by annual interest gives interest cover. A ratio below about three times suggests borrowing could become hard to service if trading dips. Many lenders build a minimum into loan terms.