## 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).

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#### 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,

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