# EBIT Calculation

Last Updated :

21 Aug, 2024

Blog Author :

Edited by :

Pallabi Banerjee

Reviewed by :

Dheeraj Vaidya, CFA, FRM

Table Of Contents

## How to Calculate EBIT?

EBIT is the measure of a company’s profitability. EBIT calculation deducts the cost of goods sold and operating expenses.

##### Table of contents

- EBIT determines a company's profitability. Its calculation dedicates the cost of goods sold and operating expenses.
- The income statement formula is
*Earnings Before Interest and Tax = Revenue – Cost of Goods Sold– Operating Expenses* - Using contribution margin, the formula is Sales – Variable Cost – Fixed Cost = EBIT.
- Sales – Variable Cost is also known as contribution margin.

### 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 calculate 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,
- The 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, the 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, and EPS will be the same for the given below alternatives:

- Equity of $ 60 million of $ 10 each and 12% debenture of $ 40 million
- Equity of $ 40 million of $ 10 each, 14% preference share capital of $ 20 million, and 12% debenture of $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,

### Frequently Asked Questions (FAQs)

**When to use EBIT vs EBITDA?**Companies often use EBITDA over EBIT, which have invested mainly in tangible or intangible assets. Thus, it has high annual depreciation or amortization costs, and they reduce EBIT and net income.

**Where is EBIT on balance sheet?**To obtain the EBIT value on the balance sheet, one must consider the value for revenue or sales from the top of the income statement. Then, deduct the cost of goods sold from revenue or sales. As a result, it will provide gross profit. Then later, deduct the operating expenses from the gross profit figure. The result is called EBIT.

**Can EBIT be higher than EBITDA?**EBIT does not include interest charges but considers depreciation. In comparison, EBITDA deducts both. Consequently, EBITDA will be higher than EBIT. Also, EBITDA will be higher than EBIT if the company purchases any intangible asset like a patent and amortizes the cost.

**Are EBIT and gross margin the same?**Gross profit is shown on a company's income statement. It is the profit a company earns after eliminating the costs related to creating the products or enabling the services. At the same time, EBIT determines a company's profitability by displaying earnings before interest, taxes, depreciation, and amortization.

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