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.

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 –

• What is COGM Formula?
• Advantages of Fixed Cost
• Examples of Fixed Cost
• What is the Cost of Goods Manufactured (COGM)?
• EBIT Margin Formula
• EBITDA Formula
• EBITDAR Formula
• EBIT vs EBITDA |Compare