##### Formula and Execution
 Revenue The income generated from the selling of the product or giving services to someone. Operating Expenses The expenses incurred to generate sales are called operating expenses. EBIT The profit of an organization before the deduction of taxes and interest expense.

## Earnings before interest and taxes Calculator (EBIT calculator)

Corporations are involved in complex and large transactions daily. Every department of the company plays a role in generating sales. Companies incur some expenses while generating sales. These expenses are must for the generation of sale; otherwise, there will be no sales. Sometimes the expenses increase quickly while the sales remain the same or increase slowly. Companies need to keep a tab on the expenses and sales. The corporations must keep a check on the expenses while increasing sales. The ultimate purpose of the companies is to increase their operating profit and decrease their operating expenses, that is where the EBIT calculator came into play. EBIT calculator helps in calculation of the operating profit. Calculating operating profit manually is a laborious and arduous task.  “Calculator beast” has developed different tools to make the process of calculation easy and straightforward; one such tool is EBIT calculator.

### Why is the EBIT calculator used?

While calculating EBIT manually, it poses different problems, such as:

• The risk of wrong calculation increases.
• It takes a lot of time and energy, so it is a time-consuming process.
• The efficiency and effectiveness of the system decrease with manual calculation.

To get rid of such problems, we use EBIT calculator.

It is useful in many ways, such as:

• EBIT calculator takes less time to calculate EBIT, so it saves much of the time.
• The calculation process is more reliable subject to the condition that the values are correctly put in the calculator.
• The system becomes more efficient and effective.
• The layman can also use EBIT calculator for the calculation of EBIT.

### To whom will it help?

EBIT calculator is helpful for all those who need to calculate EBIT such as:

Companies need to calculate their EBIT, to come up with the profit from operations.

Students need to calculate EBIT while doing their assignments on the financial performance of the companies.

Investors also need EBIT calculator to calculate EBIT of the company while planning investment in that particular company.

Academics also need EBIT calculator to calculate EBIT of the company while performing a research study on the financial performance of the companies.

### Earnings before interest and taxes (EBIT)

Earnings before interest and taxes are one of the most important indicators to know about the operating capability of the company. The value of EBIT shows how much the company is operationally strong. EBIT is also called operating profit because it is a profit which is generated by the operations of the company. Investors mostly focused on the operating profit of the company while making an investment decision about the company. EBIT helps investors to find whether the company can pay its debts and fund ongoing operations.

#### Steps involved in the EBIT calculator

There are two steps involved while calculating EBIT through EBIT calculator; these steps are:

• Revenue: Put the amount of revenue generated in the revenue box.
• Operating Expenses: Put the value of operating expenses in the subsequent box.

Once these two values are put in EBIT calculator, it gives EBIT amount in the EBIT box.

Example 1:

Abbot Private Ltd sold products worth \$ 5,000. The operating expenses of the Abbot private Ltd were \$ 2,000. Find the EBIT of Abbot Private Ltd.

Solution:

Revenue = \$ 5,000

Operating Expenses = \$ 2,000

EBIT =?

Put these values in the EBIT calculator, and it gives EBIT as follow.

Example 2:

The operating expenses of the Abbot private Ltd were \$ 2,000, and the EBIT of the company was \$ 3,000. Find the revenue generated by Abbot private Ltd.

Solution:

Operating Expenses = \$ 2,000

EBIT = \$ 3,000

Revenue =?

Put these values in the EBIT calculator, and it gives revenue as follow:

Example 3:

Abbot Private Ltd sold products worth \$ 5,000.The operating profit of the company is \$ 3,000. Find the operating expenses of the company.

Solution:

Revenue = \$ 5,000

EBIT = \$ 3,000

Operating expenses =?

Put these values in the EBIT calculator, and it gives operating expenses as follow.

#### Formulas used in the EBIT calculator

There are three formulas used in the EBIT calculator.

1. EBIT formula: This formula is used to find the operating profit of the organization. The EBIT formula is (Revenue – Operating Expenses).
2. Operating Expenses formula: This formula is used to find the operating expenses of the company. The operating expenses formula is (Revenue – EBIT).
3. Revenue Formula: This formula is used to find the revenue of the company. The formula of revenue is ( EBIT + Operating expenses)

Example: Philip & Muller is a shoes manufacturing company. The revenue generated in the current month of the financial year 2020-2021 is \$ 8,000. The operating expenses of the company are \$ 3,000. Find the EBIT of the company.

Solution:

Revenue = \$ 8,000

Operating expenses = \$ 3,000

EBIT =?

EBIT = Revenue – Operating expenses

= \$ 8,000 - \$ 3,000

EBIT           = \$ 5,000

You can easily solve this through EBIT calculator as follow.

Example 2:

Philip & Muller is a shoes manufacturing company. The revenue generated in the current month of the financial year 2020-2021 is \$ 8,000. The operating profit of the company is \$ 5,000. Find the operating expenses of the company.

Solution:

Revenue = \$ 8,000

EBIT = \$ 5,000

Operating expenses =?

Operating expenses = Revenue – EBIT

= 8,000 – 5,000

Operating expenses = \$ 3,000

You can quickly solve this through EBIT calculator as follow.

Example 3:

Philip & Muller is a shoes manufacturing company. The operating profit of the company is \$ 5,000, and the operating expenses of the company are \$ 3,000. Find the revenue generated by the company.

Solution:

Operating profit = \$ 5,000

Operating expenses = \$ 3,000

Revenue =?

Revenue = Operating profit + Operating expenses

= 5,000 + 3,000

Revenue = \$ 8,000

Solving manually is hectic and time consuming task, you can easily solve this as follow through EBIT calculator.

### FAQS

#### What is the difference between EBIT and NOPAT?

EBIT is a gross operating profit which is obtained by the deduction of operating expenses from the revenue, i.e. (Revenue – Operating expenses). Net operating profit after tax (NOPAT) is obtained when we deduct taxes from the gross operating profit, i.e. Gross operating profit (1- Tax).

#### What is the relation between EBIT and corporate taxes?

EBIT is an operating profit, and it helps investors to analyze the financial performance of the company before tax deduction. It helps the investors to analyze the company with two different tax structure.

Example: There two companies, company A and company B. EBIT of company A is \$ 5,000 while EBIT of company B is \$ 4,000. The tax levy on company A is 30% while that on company B is 25%. So company B will pay less tax, but investors will invest in company A because company A is operationally efficient and strong.

#### What is the relation between EBIT and debt?

Those company who need non-current assets for their operations mostly finance it with the debt. Debt increases the default chances of the company, and on the positive side, it gives tax benefit to the company. Investors, while investing in a company focus on the operating profit of the company, i.e. the profit before tax and interest expense. The reason behind the interest of investors in operating profit is that the net profit is obtained when we deduct non-operating expenses from the operating profit. So the net profit is not the fair depiction of the company operations.

#### When EBIT and operating profit can be different?

EBIT and operating profit are mainly the same concepts. However, there arise differences between the two when non-operating income is included in the profit and loss statement of the company. In this scenario, EBIT is obtained when operating expenses are deducted from operating and non-operating income. In contrast, operating profit is obtained when operating expenses are deducted from operating income.

Example: Johnson private limited is operating in the manufacturing industry. The operating income of the company is \$ 7,000, while the non-operating income of the company is \$ 4,000.The operating expenses of the company are \$ 3,000. Find the EBIT and operating profit of the company.

Solution:

Operating income = \$ 7,000

Non-operating income = \$ 3,000

Operating expenses = \$ 3,000

EBIT =?

Operating profit =?

EBIT = Income – Operating expenses

= 7,000+3,000 – 3,000

= 10,000 – 3,000

EBIT   = \$ 7,000

Operating profit = Operating income – operating expenses

= 7,000 – 3,000

Operating profit = \$ 4,000

You can see the difference between operating profit and EBIT. If the non-operating income head was not there then operating income and EBIT is one and same thing.

NOTE: The income which a company obtained from investment in other companies or government securities is called non-operating income.

#### What is the difference between EBIT and EBITDA?

Those company who have a significant amount of the fixed assets, they need to depreciate their long term assets with time. Companies also amortized their intangible assets. Depreciation and amortization are non-cash expenses, and companies include these expenses in their profit and loss statement to reduce their operating profit amount. This help the company to pay less tax. So EBITDA does not take depreciation and amortization into calculations. In contrast, EBIT takes depreciation and amortization into calculations. Those companies who have a huge amount of non-current assets, they will record less net profit due to the huge amount of depreciation as compared to those who have less non-current assets.

#### What are the limitations of operating profit?

EBIT is a good indicator of the company operational capabilities. However, at the same time, EBIT has its limitations, such as:

• EBIT take depreciation and amortization into account. So when investor compares two different companies with different non-current assets, the company with huge long terms assets will record low operating profit, and this will hugely affect the reputation of the company as an operationally sound company.
• EBIT does not consider interest expense, so when investors decide based on the EBIT, it can mislead the investor. As for those companies whose capital structure is dominated by debt financing, they have a chance of default. So the investor is investing in a company which have chances of default.

#### What is EBT?

EBT is earning before tax when interest expenses are deducted from EBIT, and it becomes EBT.

#### What does negative EBIT mean?

Negative EBIT means that the company was selling less and incurring huge operational expenses. Fewer sales mean that there is a problem in pricing the product or the advertisement campaign for the company is weak. Either case these need to be sorted out by the company because EBIT is face of the company operationally capability. If EBIT is negative, then it means that the company is not in a position to grow further.

#### How to calculate in EBIT in MS Excel?

There is no specific formula of EBIT in excel, but we can solve EBIT in Excel as follow.

• Put the value of revenue in any cell of the MS excel.
• Put the cost of Goods sold figure if any in the following cell.
• Put the operating expense figure in the subsequent cell.
• Now apply the EBIT formula (Revenue – Operating expenses), it gives you EBIT value.

Example: ABC public limited company is operating in the service industry. The revenue generated by the company in the current financial year is \$ 90,000, and the cost of the services provided was \$ 12,000. The administrative expenses were \$ 15,000. Find the EBIT of the company.

Solution:

Service revenue = \$ 90,000

Cost of service provided = \$ 12,000