EBIT stands for "earnings before interest and tax." The EBIT margin is EBIT divided by net revenue. Investors use EBIT margin to see how earnings of the company grow from year to year. Since EBIT does not include interest or tax, it shows how the firm operates. Interest has no bearing on the firm's operation and the effective tax rate can vary from year to year. Therefore, EBIT may be more accurate than net income in determining operational efficiency.
- Skill level:
Determine EBIT. Some companies will disclose EBIT in the notes to their financial statements. If the company does not disclose EBIT, then add back interest expense and tax expense from net income. These accounts are found on the income statement. For instance, if a company has £325,000 of net income and pays £1,300 in interest expenses and £6,500 in taxes, its EBIT would equal £325,000, plus £1,300 plus £6,500, which is £332,800.
Determine the company's net revenue. This information is found on the company's income statement. For example, a company may have £585,000 of net revenue.
Divide EBIT by net revenue to determine EBIT margin. In the example above, £332,800 divided by £585,000 equals an EBIT margin of 0.5688, or 56.88 per cent.
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