What is EBIT (earnings before interest and tax)?

There are two routes to the same number. Starting from the top of the profit and loss, EBIT is revenue minus cost of goods sold minus operating expenses, with depreciation and amortisation counted among those expenses. Starting from the bottom, EBIT is net profit plus interest expense plus tax expense. Both give the same result because interest and tax are the only items that sit between EBIT and the bottom line.

Non-operating items such as investment income or a one-off gain on an asset sale can inflate EBIT. For performance analysis these are usually stripped out to give an adjusted EBIT. The key is to make the adjustments consistently from period to period and to disclose what has been added back or removed.

Lenders use EBIT to judge whether a business can service its debt. The interest coverage ratio (EBIT divided by interest expense) shows how many times operating profit covers the annual interest bill, and loan covenants are often written around EBIT or adjusted EBIT. Providers of asset finance and working capital finance commonly use EBIT metrics when setting facility terms.

Investors use EBIT as the operating-profit numerator in valuation multiples such as EV/EBIT. Inside the business, management uses it for budgeting, target-setting and incentive plans because it reflects sales, margins and cost control rather than financing decisions. EBIT margin (EBIT divided by revenue) shows how many cents of operating profit each dollar of sales produces, and is best compared with peers in the same industry.

EBIT counts depreciation and amortisation as expenses. EBITDA adds them back, which makes it useful for comparing businesses with different asset ages or depreciation policies. Net profit sits at the other end, after interest, tax and every other item. Two businesses with the same EBIT can have very different capital expenditure needs, so capital-heavy industries need extra context and comparisons work best within an industry.

EBIT is not cash. Depreciation is a non-cash charge, so EBIT says nothing about the cash available for repayments; operating cash flow and free cash flow do that job. Lease accounting under AASB 16 also matters: lease costs move from rent into depreciation and interest, which can lift EBIT, so compare like with like across periods. Persistently negative EBIT means core operations are losing money and is an early warning sign.