EBIT Margin Formula

EBIT Margin Formula is the profitability ratio which is used to measure that how far the business is able to manage its operations effectively and efficiently and is calculated by dividing the earnings before interest and taxes of the company by its net revenue.

What is EBIT Margin Formula?

The term EBIT margin formula refers to the profitability formula that helps in the assessment of a company’s profitability owing to the core operations. The investor uses the EBIT margin equation as a decision tool to calculate what percentage of the gross income will be retained by the company as operating profit.

The EBIT margin formula can be calculated first by deducting the cost of goods sold COGSCOGSThe 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 and operating expenses from total / net sales, then dividing the result by the total / net sales and expressed in percentage. EBIT margin is also known as Operating margin.

EBIT Margin Formula is represented as,

EBIT Margin Formula = (Total sales – COGS – Operating expenses) / Total sales * 100%

Alternatively, the EBIT Margin Formula can also be computed by adding back taxes and interest expense to the net income (non-operating income and expense adjusted) and then divide the result by total /net sales.

EBIT Margin Formula is represented as,

EBIT Margin Formula = (Net income + Interest expense + Taxes) / Total sales * 100%

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Source: EBIT Margin Formula (wallstreetmojo.com)

Explanation of the EBIT Margin Formula

The Operating Margin equation can be computed in the following five steps by using the first method:

  1. Firstly, the total sales can be noted from the income statement.

  2. Now, the COGS is also available in the income statement. It is calculated by adding the beginning inventory to the additional inventory purchase during the accounting period and then deducting the closing inventoryClosing InventoryThe ending inventory formula computes the total value of finished products remaining in stock at the end of an accounting period for sale. It is evaluated by deducting the cost of goods sold from the total of beginning inventory and purchases.read more.

    COGS = Inventory at the beginning of the year + Additional inventory purchase – Inventory at the end of the year

  3. Now, gather the operating expenses from the income statement. It includes various direct costs and indirect costs, which may include labor costs, administrative expenses, etc.

  4. Now, the operating income is computed by deducting COGS (step 2) and operating expenses (step 3) from the total sales Step 1.

    Operating income = Total sales – COGS – Operating expenses.

  5. Finally, the Operating margin equation is derived by dividing the operating income (step 4) by total sales (step 1), as shown below.

    EBIT Margin Formula= (Total sales – COGS – Operating expenses) / Total sales * 100%

Using the second method, the calculation of  EBIT margin formula can be done using the following steps:

Step 1: Firstly, one can capture the net income from the income statement. Ensure that the net income is adjusted for non-operating income (deduct) and expense (add back).

Step 2: Now, the interest expense can be found available in the income statement.

Step 3: Now, one can also collect taxes from the income statement.

Step 4: Next, the operating income is derived by adding back the interest expense (step 2) and taxes (step 3) to the net income (step 1).

Operating Income = Net income + Interest expense + Taxes

Step 5: Now, note the total sales from the income statement.

Step 6: Finally, the EBIT margin formula is derived by dividing the operating income (step 4) by total sales (step 5), as shown below.

Operating Margin Equation= (Net income + Interest expense + Taxes) / Total sales * 100%

Examples of EBIT Margin Formula (with Excel Template)

Let’s see some simple to advanced examples to understand the calculation of the EBIT Margin equation better.

You can download this EBIT Margin Formula Excel Template here – EBIT Margin Formula Excel Template

EBIT Margin Formula – Example #1

Let us take an example to compute the EBIT margin for a company called PQR Ltd. The company is in the business of producing customized roller skates for both amateur and professional skaters. The company has generated $150,000 in total sales at the end of the financial year, along with the following expenses.

  • Cost of goods sold: $70,000
  • Depreciation expense: $25,000

Above is data for calculation of EBIT Margin for a company PQR Ltd

To find EBIT Margin, we need to first calculate the Operating Income of company PQR Ltd

Now, Operating Income can be calculated as,

Ebit margin formula eg1.1png

Operating income = Total revenue – Cost of goods sold – Operating expense

= $150,000 – $70,000 – $25,000

Ebit margin formula eg1.2png

Therefore, the Operating Income of company PQR Ltd= $55,000

Now, we will calculate the EBIT Margin of company PQR Ltd

Ebit margin formula eg1.3png

Operating Margin = Operating income / Total sales *100%

= $55,000 / $150,000 * 100%

= 36.67%

Ebit margin formula eg1.4png

Therefore, the Operating margin of PQR Ltd is 36.67%.

EBIT Margin Formula – Example #2

Now let us take the example of Apple Inc.’s financial statement for the last three accounting periodsAccounting PeriodsAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more, which is publicly available. Based on publicly available financial informationFinancial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc.read more, the EBIT margin of Apple Inc. can be calculated for the accounting years 2017 to 2018.

The below table shows data for calculation of EBIT margin of Apple Inc.for accounting years 2017 to 2018.

Ebit margin formula eg2

We will first calculate Operating Income Using First Method for Apple Inc,

Operating Income for Sep 30,2017

Operating Income of Apple Inc for Sep30,2017 can be calculated as,

Ebit margin formula eg2.2png

Operating Income =Total Sales – Cost of Goods Sales(COGS) – Operating Expenses

= $229,234 Mn – $141,048 Mn – $11,581 Mn – $15,261Mn

Operating Income for Sep30,2017 = $61,344Mn

Operating Income for Sep 29,2018

Operating Income of Apple Inc for Sep 29,2018 can be calculated as,

Ebit margin formula eg3.1png

Operating Income = Total Sales – Cost of Goods Sales(COGS) – Operating Expenses

= $265,595 Mn – $163,756 Mn – $14,236 Mn – $16,705 Mn

= $70,898 Mn

Now, we will calculate Operating Income Using Second Method for Apple Inc,

Operating Income for Sep 30,2017

Operating Income of Apple Inc for Sep 30,2017 can be calculated as,

Ebit margin formula eg3.2png

Operating Income = Net income + Interest expense + Tax

= $48,351 Mn + $2,323Mn + $15,738Mn

= $61,344 Mn

Operating Income for Sep 29,2018

Operating Income of Apple Inc for Sep 29,2018 can be calculated as,

Ebit margin formula eg3.3png

Operating Income = Net income + Interest expense + Tax

= $59,531 Mn + $3,240 Mn + $13,372 Mn

= $70,898 Mn

Operating Margin of Apple Inc for Sep 30, 2017

Therefore, calculation of EBIT Margin of Apple Inc for Sep 30 2017 will be

Ebit margin formula eg2.6png

EBIT Margin = Operating Income / Net sales *100%

= $61,344Mn / $229,234 Mn * 100%

= 26.76%

Therefore, the Operating Margin of Apple Inc. during 2018 stood at 26.76%.

Operating Margin of Apple Inc for Sep 29, 2018

Therefore, calculation of Operating Margin of Apple Inc for Sep 29, 2018 will be

Ebit margin formula eg3.4png

Operating Margin = Operating Income / Net sales *100%

= $70,898 Mn / $265,595 Mn * 100%

= 26.69%

Therefore, the Operating Margin of Apple Inc. during 2018 stood at 26.69%.

Relevance and Use of EBIT Margin Formula

The EBIT margin formula is a profitability metric that helps to determine the performance of a company, which is computed by determining the profit before interest payment to lenders or creditors and tax payment to the government. This profitability metric is measured in terms of percentages, like most other financial terms. Since the EBIT margin equation measures profit only in terms of percentage, financial users can utilize this metric to compare differently sized (large corporate, mid-corporate, and small & medium enterprise) companies across the industry. However, there remains a limitation of the EBIT margin formula that it is particularly useful when comparing similar companies in the same industry.

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