EBIT

EBIT or ‘Earnings Before Interest and Taxes’ measures a company’s operating profitability for a specific time period after deducting the cost of goods sold and operating expenses.
Earnings before interest and taxes can be obtained by deducting expenses excluding tax and interest from the revenue generated.
EBIT is also known as ‘Operating earnings’, ‘Operating profit’ and ‘Profit before Interest and Taxes’. EBIT is a simple measure which shows the amount of profit generated by a company from its operations. Interest and taxes are not part of the EBIT calculation because they do not arise due to the operating activities.

Calculation of EBIT

Calculation of EBIT
EBIT = Gross Profit – Operating Expenses
EBIT = Revenue – (COGS + Operating Expenses)
COGS=Cost of Goods Sold

Limitations of EBIT

Limitations of EBIT are:
1. EBIT does not consider depreciation which can lead to varying results while comparing companies from different industries.
2. Companies with high debt will have a high interest expense and EBIT removes the interest expense. Thus, it does not give the true picture.