When assessing a company’s performance, there are lots of metrics that you could look at. You can take a look at market share. You could check out product ratings. You could analyze the competitive matrix of all the suppliers in the market.
But perhaps no metrics are as telling as the financial ones. The numbers that go on our income statement are, at the end of the day, definitive of your company’s success.
In this article, we’ll teach you how to calculate EBIT. EBIT is one of the principal financial measures of a company’s health. While it may at first seem like a complicated idea, the EBIT calculation from the balance sheet or income statement process is actually quite simple and not as hairy as one might originally think.
How to Calculate EBIT
EBIT stands for Earnings Before Interest and Taxes.
You can find EBIT from the balance sheet or from the income statement. As a general rule, many companies that issue public financial statements will list EBIT as one of the subtotals before the final line on the income statement. Thus, it may generally be easier to find it on the balance sheet.
EBIT is essentially the total gross revenue of the business before it was taxed and before it paid interest. In many instances, because taxation happens during the course of the year and not just in one fell swoop at the end of the year, calculating EBIT will require that you add back taxes to the taxed revenue that’s on your income statement at the end of the fiscal year.
Why is EBIT Important?
So why is EBIT such an important financial metric? What is its application?
To answer that, one has to first understand another metric: EV. EV stands for Enterprise Value and is the total figure that a company is valued at. For instance, let’s say a publicly-traded company has a total market cap of $100 million. It owes $10 million in loans it has taken from a banking institution like Yourfundingtree.com. The enterprise value is equal to the market cap less any liabilities, so $100 – $10 is $90 million.
Then, one can find the EBIT multiple by dividing EV by EBIT. If earnings before interest and taxes were $9 million for the year, then $90 million / $9 million gives an EBIT multiple of 10. This means that the company is being valued at 10x its operating income.
A company with a very high EBIT multiple may be overvalued. A company with a low EBIT multiple may be undervalued and thus a good candidate for investment.
Financial Metrics Are the Most Telling
Now that you know how to calculate EBIT and how to use the metric to make financial decisions, you should have a better appreciation for how financial metrics are often the most telling ones with regard to the company’s performance.
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