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ProfitabilityEBIT

What is EBIT (Earnings Before Interest & Taxes)?

Earnings Before Interest and Taxes measures a company's operating profitability, removing the effect of capital structure (interest payments) and tax jurisdiction. EBIT is the numerator in the EV/EBIT multiple and a key component of the Altman Z-Score (EBIT/Total Assets). It allows apples-to-apples comparison across companies with different debt levels and tax rates.

Formula

EBIT = Net Income + Interest Expense + Tax Expense (or: Revenue - COGS - Operating Expenses)

EBIT in the Magic Formula and Altman Z-Score

Greenblatt's Magic Formula ranks stocks by two factors: earnings yield (EBIT / Enterprise Value) and return on capital (EBIT / (Net Working Capital + Net Fixed Assets)). Using EBIT rather than EBITDA was a deliberate choice: D&A represents real economic cost for capital-intensive businesses, and ignoring it would systematically favor businesses with heavy capex requirements over asset-light competitors.

The Altman Z-Score, developed in 1968 to predict corporate bankruptcies, uses EBIT/Total Assets as one of its five components. Companies with an overall Z-Score below 1.81 are classified in the distress zone; above 2.99 is the safe zone. The EBIT/Assets component captures whether management is generating adequate returns on the asset base -- a deteriorating ratio often precedes financial distress by several years.

Explore EV/EBITDA Valuation

EV/EBIT and EV/EBITDA are closely related multiples. Explore the EBITDA glossary entry to understand the full operating earnings framework.

Learn About EBITDA →

Frequently Asked Questions

What is EBIT and how does it differ from EBITDA?+
EBIT (Earnings Before Interest and Taxes) is operating profit after accounting for depreciation and amortization. EBITDA goes one step further, adding back both D&A expenses on top of EBIT. EBIT is a stricter profitability measure because it accounts for the capital consumption of physical assets through depreciation. For capital-intensive businesses -- manufacturers, utilities, telecommunications companies -- EBITDA can significantly overstate true cash earnings. EBIT is a more conservative and often more honest measure of operating profitability for these industries.
How does EBIT differ from operating income?+
For most companies, EBIT and operating income are equivalent and can be used interchangeably. They differ only when a company includes non-operating income or expense items (such as gains or losses on asset sales, or income from equity investments) within its operating income line. In strict GAAP reporting, operating income may or may not include these items depending on the company's presentation. When analyzing companies, it is worth checking the footnotes to confirm what is and is not included in each company's reported operating income.
Why do investors use EV/EBIT as a valuation multiple?+
Joel Greenblatt's Magic Formula uses EV/EBIT as the earnings yield component (rather than EV/EBITDA), specifically because depreciation is a real cost for capital-intensive businesses. A manufacturing company that depreciates $100M of equipment per year will eventually need to spend cash to replace those assets -- D&A is not a free source of earnings that can be permanently added back. EV/EBIT preserves this economic reality. For asset-light businesses (software, services), the gap between EBIT and EBITDA is minimal, making the choice of multiple less consequential.
How does EBIT appear in the Altman Z-Score?+
The Altman Z-Score uses five financial ratios to predict corporate bankruptcy risk. Ratio X3 is EBIT divided by Total Assets -- measuring operating profitability relative to the total asset base. A high EBIT/Assets ratio indicates that the company is generating strong returns on its asset base, which reduces bankruptcy risk. When this ratio falls below industry norms -- particularly when EBIT turns negative -- it is a signal that the company's assets are no longer generating sufficient returns to sustain the business, which the Z-Score interprets as elevated financial distress.

Related Terms

EBITDA

Earnings before interest, taxes, depreciation, amortization

EV/EBITDA

Enterprise value relative to EBITDA

Operating Margin

Operating profit as a percentage of revenue

ROCE

EBIT relative to total capital employed

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