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Jargon Buster – EBIT/EBITDA

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Earnings before interest and taxes (EBIT) is an indicator of a company’s profitability. EBIT can be calculated as revenue minus expenses excluding tax and interest. EBIT is also referred to as operating earnings, operating profit, and profit before interest and taxes.

EBIT is a useful tool for analysing a company’s profit, particularly when comparing two different businesses as you can look at the underlying earnings. Interest and Tax can vary year to year, or based on the structure of the business. For example, a company may have been using old tax credits to reduce their tax bill, or may have high debt levels (and therefore interest expense) due to the nature of their industry.

There are numerous metrics you can use to analyse the profitability of a business. Aside from EBIT, EBITDA (earnings before interest, taxes, depreciation, and amortization) is another widely used metric. In addition to interest and taxes, EBITDA removes, depreciation, and amortization from the equation. This helps businesses gain a better sense of the profitability of their operational performance.

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