EBIT is an abbreviation of earning before interest and tax, as the abbreviation suggest it is nothing but the calculation of profit earned by the company before the payment of interest and tax. It is also called as operating profit.
EBIT= Operating income - Operating expense + Non operating income
An investor who maybe supporting funding of the expansion plan of the company will be mainly concentrating on the potential of the company to earn, EBIT will give a clear picture for the above case. EBIT shows the actual earning capacity of the company. The main advantage of using EBIT is that it excludes the complication involved in calculation of tax structures followed by various companies. The tax structure varies from company to company. The main advantage of EBIT is that it is easy to calculate. It is used to find the general health of the company.
EBIT helps the investor in understanding the following things,
EBIT thus provide a insight into the company performance to the investor. Efficiency performance between various companies can be found. The bankers and other fund supporters can find out whether funding the company is a good option based on EBIT finding. The investor can find out the reason for decline in profit after taxation and interest deduction with the help of EBIT. The efficiency of the management can also be determine by using EBIT cause the level to which the management uses its asset and man power depicts the management efficiency. In general a company with higher operating margin is considered to be a better performer, thus helpful in comparing the performance of two companies. EBIT helps the investor in making investment decisions.