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Earnings Before net Interest and Tax (EBIT)

Just like Net profit after tax (NPAT), there are not too many more important numbers than the Earnings Before net Interest and Tax (EBIT). It is surprising that there are a number of companies listed on exchanges around the world that do not make money and often they are of little interest to investors.

EBIT is calculated by taking the earnings (before significant items and extraordinary items) before net interest has been deducted and before the income tax obligation on the earnings has been deducted. Net interest is the total interest paid on borrowings (or borrowing costs) minus any interest received on money deposited.

The EBIT can sometimes be found in the statement of financial performance (previously known as the Profit and Loss Statement), although many companies will just list one figure for earnings before tax and this will include significant items.

The EBIT Margin is another measure investors can use to assess the financial health of a company. The EBIT Margin shows you the percentage of each dollar of sales revenue that is left after all expenses have been removed, excluding net interest and income tax expenses.

As the EBIT Margin differs markedly between different industries it is important that this is taken into account when comparing companies.

In Australia, retail companies like Woolworths and Coles Myer expect to have quite a small EBIT Margin as they rely on small margins accompanied with high sales volume. Other industries would have far smaller sales volume but expect to offset that with much higher profit margins.

All of these different factors directly impact on the EBIT Margin.

Unlike many fundamental pieces of data, it is possible to consider the EBIT in isolation, and it often is. However, it can be combined with other data to form a more detailed picture or just looked at on its own as a general trend. One of the greatest strengths of successful copmpanies is the ability to generate profits and provide above average returns to shareholders and many investors, like Berkshire Hathaway, make this a primary consideration in their decision to buy.

EBITDA: earnings before interest, taxes, depreciation, and amortization.

Depreciation = non-cash expense of the wear and tear on fixed assets based on the respective useful lives

Amortization = non-cash expense of writing off intangible assets over their useful lives.

EBITDA is often used to compare the profit potential between companies because it allows a fair comparison. Note however, that EBITDA does not accurately reflect a company’s ability to generate cash and should not be used to replace the term “cash flow”,

Profitability. Profitability % = EBIT / SALES This measurement represents the operating performance of a business expressed as a return on sales. It also provides a measurement of operational efficiency in the profit and loss account, void of finance costs.

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29. May, 2011

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