Technical / Accounting
EBIT: The Pre-Financing Profit Line
EBIT measures operating profit before financing costs and taxes. Learn the formula, components, and why bankers use it for valuation.
"The most important number in the accounts is operating profit... everything else is just financing and tax." — Terry Smith
Concept
EBIT (Earnings Before Interest and Taxes) measures how much profit a company generates from its core operations. It deliberately excludes interest expense and income taxes because those depend on capital structure and jurisdiction—not operational performance. Think of it as the profit available to pay lenders, the government, and shareholders before any of them actually get paid.
Intuition
EBIT answers one question: How good is this company at running its actual business?
Imagine you're buying a company with all cash—no debt financing. You don't care about the seller's existing interest expense because you're wiping it away. You care about what the operations produce.
That's EBIT. It's the profit generated before deciding how to finance the asset and before the government takes its cut. Bankers use it constantly in LBOs and M&A because the acquirer's capital structure will replace the target's.
Components
Gross Profit
What It Is
Revenue minus the direct costs of producing goods or services. This includes raw materials, direct labor, and manufacturing overhead.
How to Calculate It
Key Consideration
Interview Script
EBIT, or Earnings Before Interest and Taxes, measures a company's operating profitability independent of its capital structure and tax jurisdiction. We use it heavily in M&A and LBO analysis because when you're acquiring a business, you don't care about the seller's existing debt or interest expense—you're replacing their capital structure with your own. It essentially tells you what the core operations actually produce before financing and tax decisions.