EBIT

EBIT is a company's financial result calculated before interest on debt and income tax have been deducted from it. It is an attempt to see the business as a production machine: how much it earns from its core operations, regardless of whose money paid for the equipment and at what rate the company pays into the budget. The measure sits in the income statement and serves as the basis for comparing companies with different debt loads.

What stays inside the measure and what is left out

EBIT is calculated from revenue down the statement: first the cost of sales comes off, then selling and administrative expenses. Importantly, depreciation and amortisation is not excluded from the measure — this is exactly what sets EBIT apart from EBITDA. As a result, a company that spends heavily on fixed assets looks more modest on an EBIT basis: the wear and tear of assets stays in expenses and weighs on the result. Beyond that point begins what the measure does not include: interest on loans, tax and, as a rule, one-off non-operating items.

In practice the line is drawn in different ways. One issuer books foreign exchange differences as operating expenses, another moves them further down; some show asset impairment within operating profit, others as a separate line. That is why EBIT taken from two sets of accounts is not always comparable, and the calculation should be checked against the notes.

Example

The site publishes operating profit as the reported figure closest to EBIT — for Lukoil it stands at 77 100 000 000. Setting this figure against the value of the whole company gives the EV/EBIT multiple: it shows how many operating profits the market is paying for the business together with its debt.

Where the measure misleads

EBIT loses its meaning where interest is the core business itself. For a bank and for a leasing company, interest expense is not a means of financing but the raw material of the business; strike it out and you strike out the very subject of the analysis. The second common mistake is to treat EBIT as cash flow. It remains an accounting figure: it contains amounts accrued but not yet collected in accounts receivable, and it says nothing about the capex the company has to pay for in order to keep the same profit next year.