How to Calculate EBIT?
EBIT is the measure of a company’s profitability. EBIT calculation is done by deducting the cost of goods sold and operating expenses.
- EBIT shows the operating profit of the company
- It does not deduct the expenses related to interest or tax payments.
The Formula for Calculation of EBIT
EBIT Formula #1 – Income Statement Formula
Earnings Before Interest and Tax = Revenue – Cost of goods sold – Operating Expenses
EBIT Formula #2 – Using Contribution Margin
Sales – Variable Cost – Fixed Cost = EBIT
- Sales – Variable Cost is also known Contribution Margin
Step by Step Examples of EBIT Calculation
Let’s understand the above concept by seeing some simple to advanced examples of EBIT Calculation.
EBIT Calculation Example #1
We have a company named ABC Inc. having revenue of $4,000, COGS of $1,500 and operating expenses of $200.
Therefore, the EBIT is $2,300.
EBIT Calculation – Example #2
We have the following data –
- Sales $5 million
- Variable Cost– 12% of Sales,
- Fixed cost – $200,000
Let’s do the calculation of EBIT (Earnings Before Interest and Taxes).
EBIT Calculation – Example #3
Let us assume that there is a Project is of 5 Years:
- Sales $5 million and 7% increment Per Annum.,
- Contribution Margin is – 70%, 75%, 77%, 80% and 65% of Sales each year respectively,
- Fixed Cost is $125,000.
Calculate EBIT.
Solution:
EBIT Calculation – Example #4
We have the following data
- Financial Leverage – 1.4 Times
- Capital (Equity and Debt) – Equity Shares of $100 each, 34000 outstanding shares
- 10% Debentures of $10 each – total 8 million number
- Tax Rate- 35%. Calculate EBIT
Solution:
Calculation of Interest and Profit:
Financial Leverage = EBIT/EBT
Interest on Borrowings: $80 million * 10% = $8million
Therefore, calculation of EBIT is as follows,
Financial Leverage= EBIT/EBT
- 1.4 = EBIT/ (EBIT-Interest)
- 1.4 (EBIT-Interest) = EBIT
- 1.4 EBIT- ($8 milllion *1.4) = EBIT
- 1.4 EBIT- EBIT= $11.2 million
- 0.4 EBIT= $11.2 million
- EBIT= $11.2 million/ 0.4
EBIT= $28 million.
EBIT Calculation – Example #5
ABC Limited has to choose the alternative at which EBIT, EPS will be the same for the given below alternatives:
- Equity of $ 60 million of $ 10 each and 12% debenture of $ 40 million Or
- Equity of $ 40 million of $ 10 each, 14% preference share capital of $ 20 million, and 12% debenture of Rs 40 million.
And Tax= 35%. Calculate EBIT, at which EPS will be indifferent between alternatives.
Solution:
Alternative 1:
EPS(Alt-1) = (EBIT-Interest) (1-tax rate) / No. of Equity Shares
- = (EBIT- 12%* $40 million) (1-0.35)/6 million
- = (EBIT- $4.8 million)( 0.65)/6 million
Alternative 2:
EPS(Alt-2) = (EBIT-Interest) (1-tax rate)- (0.14* $20 million) / No. of Equity Shares
- = (EBIT- 12%* $40 million) (1-0.35) -($2.8 million)/4.0 million
- = (EBIT- $4.8 million) (0.65) -($2.8 million)/4.0 million
Let’s compare EPS at alternative 1 with alternative 2
- EPS(Alt-1) = EPS(Alt-2)
- (EBIT- $4.8 million)( 0.65)/6 million = (EBIT- $4.8 million) (0.65) -($2.8 million)/4.0 million
Solving this equation for EBIT, we get
EBIT= $17.72308 million
EBIT Calculation – Example #6
We have the following data
- Market Value of the Firm: $ 25 million
- Cost of Equity(Ke)= 21%
- 15% Debt value = $ 5.0 million at market value
- Tax Rate = 30%.
Calculate EBIT.
Solution:
For the calculation of EBIT, we will first calculate the net income as follows,
Value of the Firm= Market value of Equity + Market value of Debt
- $25 million = Net Income/ Ke + $ 5.0 million
- Net Income= ($ 25 million -$ 5.0 million) * 21%
- Net Income= $ 4.2 million
Therefore, the calculation of EBIT is as follows,
EBIT = Net income attributable to shareholders/ (1- Tax Rate)
- = $4.2 million/ (1-0.3)
- = $ 4.2 million/0.7
- = $ 6.0 million
EBIT Calculation – Example #7
We have the following data
- Production level of Company – 10000 units
- Contribution per unit = $30 per unit
- Operating Leverage = 6
- Combined Leverage = 24
- Tax Rate = 30%.
Calculate EBIT
Solution:
Financial Leverage
Combined Leverage = Operating Leverage * Financial Leverage
- 24 = 6*Financial Leverage
- Financial Leverage = 4
Total Contribution= $30 *10000 units= $300,000
Therefore, the calculation of EBIT is as follows,
Operating Leverage = Contribution/ EBIT
- 6 = $300,000 / EBIT
- EBIT = $300,000 / 6
- EBIT = $50,000
EBIT Calculation – Example #8
We are provided with the following dataset
- Operating Leverage- 14
- Combined Leverage – 28
- Fixed Cost – (Excluding Interest) – $2.04 million
- Sales- $ 30 million
- 12% Debentures- $21.25 million
- Tax Rate = 30%.
Calculate EBIT
Solution:
Financial Leverage
Combined Leverage = Operating Leverage * Financial Leverage
- 28 = 14* Financial Leverage
- Financial Leverage= 2
Contribution
Operating Leverage = Contribution /EBIT
- 14= Contribution/ Contribution- Fixed Cost
- 14= Contribution/ Contribution- $2.04 million
- 14 Contribution – $28.56 million = Contribution
- Contribution= $ 28.56 million/13
- Contribution= 2.196923 million
Therefore, the calculation of EBIT is as follows,
Recommended Article
This has been a guide to EBIT Calculation. This is step by step guide to learn how to calculate EBIT with the help of a simple to advanced examples. You may learn more about accounting from the following articles –
