Differences Between EBIT and Operating Income
The key difference between EBIT and Operating Income is that ebit refers to earnings of the business which is earned during the period without considering the interest expense and the tax expense of that period, whereas, operating income refers to the income earned by a business organization during the period under consideration from its principal revenue-generating activities and does not consider non-operating income and non-operating expenses.
EBIT stands for Earnings before interests and taxes. It is synonymous with operating profit as it doesn’t take into consideration the taxes and interest expenses. EBIT is an indicator used for calculating a company’s profitability, and we can measure it by reducing the operating expenses from revenue.
- EBIT = Revenue – Operating Expenses
- Operating expenses include rent of the company premises, equipment used, costs through inventory, marketing activities, paying employee wages, insurance, and funds allocated for R&D.
- It can also be expressed as EBIT = Net Income + Interest + Taxes
We can describe Operating income as an amount that can convert into profit.
- Operating income is used to calculate the amount of profit gained by a company’s operations. We can calculate it by subtracting the overall expenses from Gross Income.
- Operating Income = Gross Income – Operating Expenses
- Gross Income = Revenue – Cost of Goods Sold
People tend to believe that EBIT and operating incomes are the same. But the significant difference between them is EBIT also includes non-operating income that the company generates. But in case of operating income, only the income from operations is taken into account.
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EBIT vs Operating Income Infographics
- One of the key differences between EBIT and Operating Income is non-operating income. EBIT also includes the non-operating income that the company generates along with the income from the company’s operation. But operating income only includes the income flowing through company operations in its statement.
- EBIT is used as an indicator to find out the total profit-making capability of a company. Hence, if a company or investor wants to know about the profit a company is making, EBIT can be used. On the other hand, operating income is used to find out how much of the company’s revenue can be converted into profit.
- EBIT is not an official measure, according to GAAP. Hence companies use this to make small changes to it and try to incorporate a few other things so that they can use this statement for their purposes. Whereas operating income is an official measure of GAAP, and hence it is accurately shown, and the companies don’t tinker with it.
- With EBIT, we can make few adjustments for the factors that are not accounted for to get a broader picture. Operating income is very different in this aspect, as we cannot make any adjustments so that it can strictly adhere to the guidelines proposed.
- EBIT can be measured by reducing the operating expenses from revenue or by adding interests and taxes to net income. Operating income, on the other hand, is calculated by subtracting overall expenses from gross income.
So, what are the significant differences between EBIT and operating income? Let’s have a look at the head to head differences between the operating income and EBIT.
|Basis for comparison||EBIT||Operating Income|
|Definition||EBIT is an indicator used for calculating a company’s profitability.||Operating Income is a term used to calculate the amount of profit gained by a company’s operations.|
|Usage||To calculate the profit-making ability of the company.||To calculate how much revenue can be converted into profit.|
|Calculation||EBIT = Revenue – Operating Expenses
EBIT = Net Income + Interest + Taxes
|Operating Income = Gross Income – Operating Expenses|
|Recognition||EBIT is not an official GAAP (Generally Accepted Accounting Principles) measure.||Operating income is considered as an official GAAP measure.|
|Adjustments||EBIT requires some adjustments to be made to the items that are not accounted for.||No such adjustments are being made.|
When we look at both these terms, they are almost the same in most cases. The differences are minimal as only a few adjustments are being made in EBIT while no changes are being made in operating income. So, there is very little chance of any vast difference when we compare them both.
So, companies and investors don’t care much when operating income and EBIT is used these financial statements to analyze because choosing either one over the other will not be of much difference. If it has to be differentiated for any official use or official reporting, then one is officially recognized (operating Income) while the other (EBIT) is not.
EBIT vs. Operating Income Video
This article has been a guide to EBIT vs. Operating Income. Here we discuss the top differences between EBIT and operating income along with infographics and comparison table. You may also have a look at the following articles –