EBIT Calculation

How to Calculate EBIT?

EBITEBIT Earnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more is the measure of a company’s profitability. EBIT calculation is done by deducting the cost of goods sold and operating expenses.

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Source: EBIT Calculation (wallstreetmojo.com)

EBIT Formula

Formula #1 – Income Statement Formula

Earnings Before Interest and Tax = Revenue – Cost of goods soldCost Of Goods Sold The cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more – Operating Expenses

Formula #2 – Using Contribution Margin

Sales – Variable Cost – Fixed Cost = EBIT

Sales – Variable Cost is also known Contribution MarginContribution Margin The contribution margin is a metric that shows how much a company's net sales contribute to fixed expenses and net profit after covering the variable expenses. As a result, we deduct the total variable expenses from the net sales when computing the contribution.read more

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 expensesOperating Expenses Operating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more 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 LeverageFinancial Leverage Financial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more – 1.4 Times
Capital (Equity and Debt) – Equity Shares of $100 each, 34000 outstanding sharesOutstanding Shares Outstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more
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, EPSEPS Earnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more 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 LeverageOperating Leverage Operating Leverage is an accounting metric that helps the analyst in analyzing how a company’s operations are related to the company’s revenues. The ratio gives details about how much of a revenue increase will the company have with a specific percentage of sales increase – which puts the predictability of sales into the forefront.read more * 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 CostFixed Cost Fixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more
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,

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EBIT Calculation