EBT- Earning before tax

 EBT is an abbreviation of earning before tax. It is nothing but the earning of the company on a particular quarter before the deduction of the tax from the earning. The main usage of this is to compare the performance of two company having same asset value but different taxation. This is a non GAAP method. It helps the investor to find out the actual earning of the company without any manipulation made by the company in the end outcome. This is important because in some case the company might do some changes in the earning so that it attracts investors. Earning before tax avoids such circumstance.

Earning before taxing was first used by leverage buyout to analyze the loan paying ability of the company. As the time passed out many investor started using this for various investment decision purpose. Now most of the company themselves began to quote these things in their financial reports even though it is not warranted.

Earning before taxes does have its disadvantages as well. It is good in measuring profit but has a huge disadvantage of not able to measure the cash flow.  Earning before tax never takes into account the working capital needed to run the organization.  Earning before tax leaves out small but important factors like machine replacement cost etc. Earning before tax avoids amortization as well as depreciation. The main draw back in this method being the fund allocation of the company for any expansion purpose is not show in the earning. This does not show the debt it has to pay to the debtors. The last two parts plays a major role in the final earning of the company.

Earning before tax is given by the formula

EBT=Operating revenue- expenses + non operating revenues.

The main advantage of this is that it helps the investor to find out the earning capacity of the company. EBT must be used in places only comparison of earning need to be done and where the earning capacities of the company need to be found. EBT are widely used by the debtors and investors to estimate the debt paying capacity and the earning capacity of the company.

Question

• What are the advantages of EBT method of calculating the earning?
• What are the disadvantages of EBT method of calculating the earning?