EBIT (Earnings Before Interest and Taxes)

EBIT (Earnings Before Interest and Taxes) measures a company's operating profitability by excluding the effects of financing decisions (interest expense) and tax jurisdictions. It is calculated as Revenue - COGS - Operating Expenses, or equivalently as Net Income + Interest Expense + Tax Expense. EBIT is also commonly referred to as operating income or operating profit, though there can be subtle differences depending on the inclusion of non-operating items.

EBIT is valuable for comparing companies with different capital structures and tax situations. Two identical businesses — one financed entirely with equity and the other with heavy debt — would have very different net incomes due to interest expense, but similar EBIT. This makes EBIT useful for evaluating the core operating performance of a business independent of how it's financed. It's also helpful for comparing companies across different tax jurisdictions.

In valuation, EBIT is used to calculate the interest coverage ratio (EBIT / Interest Expense), a key measure of debt safety. The EV/EBIT multiple is preferred by some value investors over P/E because it accounts for differences in leverage and tax rates. Joel Greenblatt's Magic Formula uses EBIT/Enterprise Value as its earnings yield metric specifically because it strips out leverage effects. However, EBIT still includes depreciation and amortization, which can distort comparisons between asset-heavy and asset-light businesses — this is where EBITDA becomes more useful.