## How to Calculate EBIT?

EBITEBITEarnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital.read more is the measure of a company’s profitability. EBIT calculation is done by deducting the cost of goods sold and operating expenses.

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For eg:

Source: EBIT Calculation (wallstreetmojo.com)

### EBIT Formula

#### Formula #1 – Income Statement Formula

**Earnings Before Interest and Tax = Revenue – Cost of goods soldCost Of Goods SoldThe 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 – Operating Expenses**

#### Formula #2 – Using Contribution Margin

**Sales – Variable Cost – Fixed Cost = EBIT**

- Sales – Variable Cost is also known Contribution MarginContribution MarginThe contribution margin is a metric that shows how much a company's net sales contribute to fixed expenses and net profit after covering the variable expenses. As a result, we deduct the total variable expenses from the net sales when computing the contribution.read more

### 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 expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more 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).

#### 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 LeverageFinancial LeverageFinancial Leverage Ratio measures the impact of debt on the Company’s overall profitability. Moreover, high & low ratio implies high & low fixed business investment cost, respectively. read more – 1.4 Times
- Capital (Equity and Debt) – Equity Shares of $100 each, 34000 outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more
- 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, EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more 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 LeverageOperating LeverageOperating Leverage is an accounting metric that helps the analyst in analyzing how a company’s operations are related to the company’s revenues. The ratio gives details about how much of a revenue increase will the company have with a specific percentage of sales increase – which puts the predictability of sales into the forefront.read more * 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 CostFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity.read more
- 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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