Calculating EBIT - essential for your bottom line

Understanding how to calculate EBIT is essential for every entrepreneur and investor as they can provide valuable insights on the financial health and profitability of your business.

What is EBIT?

EBIT or "Earnings Before Interest and Taxes", is a measure that reflects your company's operating profit before interest and taxes are deducted. It provides insight into operational performance by looking only at revenues and operating expenses related to a company's core business.

Calculating EBIT - how do you do it?

Calculating EBIT provides insights into a company's operating profit by considering only revenues and operating expenses, excluding interest and taxes.

Formula:

EBIT = Revenue (net) - Operating expenses

Formula according to the guidelines of the Accounting Standards Commission (CBN) in Belgium:

Start with the pre-tax profit (or loss). This is your starting point.

Deduct income not directly related to core activities: this includes income from financial fixed and current assets.

-Income from financial fixed assets (code 750)
-Proceeds from current assets (code 751)
-Other financial income (code 752/9)

Then add all costs related to debt: including debt and impairment charges that are not operational.

+ Cost of debt (code 650)
+ Write-downs on current assets (code 651)
+ Other financial charges (code 652/9)

Example:

Let's say your company generates sales of €500,000 and has operating expenses (including cost of goods sold, but excluding interest and taxes) of €300,000.

EBIT = €500,000 - €300,000 = €200,000

That is, the company has an operating profit of €200,000 before interest and taxes are deducted.

What does EBIT say about a company's financial health?

Strong EBIT indicates good operational efficiency and profitability, excluding the impact of interest and taxes. It is an indication that a company is performing well in its core business.

How much EBIT is healthy?

Determining a 'healthy' EBIT depends very much on the sector in which your company operates and the stage your business is in. In general, a positive EBIT is seen as a sign of operational strength, as it shows that your company is able to generate profits before the impact of interest and taxes.

A healthy EBIT margin varies, but as a rule of thumb, a margin of 10% or higher is often considered strong, while a margin between 5% and 10% may be considered adequate. However, in some industries, even a lower margin is acceptable, given the nature of operating expenses and fixed asset investments.

It is important to stress that evaluating your EBIT should also be done in the context of your operating results over several years to identify trends. Consistent growth in your EBIT suggests an improvement in your company's operational efficiency and profitability.

Kurt Vervloet

Kurt Vervloet is a business coach, blogger and speaker. Since 2017, he has been coaching businesses around the world, ranging from solo entrepreneurs, SME companies to executive management teams at large organisations. His clients choose to work with him because of my proven, no-nonsense approach to optimising and scaling businesses. By achieving great results with his clients, he has already been rewarded with several Awards.