EBIT Calculation

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.

EBIT Formula

Formula #1 – Income Statement Formula

Earnings Before Interest and Tax  = Revenue – Cost of goods sold – Operating Expenses

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

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.

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).

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:

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.

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

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

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  

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 a 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 –

• EBIT Margin Formula
• Formula of EBITDA
• EBITDAR
• EBIT vs EBITDA