Earnings before interest and taxes

In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.[1][2]

Operating income and operating profit are sometimes used as a synonym for EBIT when a firm does not have non-operating income and non-operating expenses.[3]

Formula

EBIT = Net income + Interest + Taxes = EBITDA – Depreciation and Amortization expenses
Operating income = operating revenueoperating expenses (OPEX) = EBIT – non-operating profit + non-operating expenses[3]

Overview

A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by earnings before interest, taxes, depreciation and amortization (EBITDA) and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g. the cost of goods sold, selling and administrative expenses) are subtracted from revenues.[4] Net income is later obtained by subtracting interest and taxes from the result.

Example statement of income (figures in thousands)[5]
Revenue
     Sales revenue $20,438
     Cost of goods sold $7,943
Gross profit $12,495
Operating expenses
     Selling, general and administrative expenses $8,172
     Depreciation and amortization $960
     Other expenses $138
     Total operating expenses $9,270
Operating profit $3,225
     Non-operating income $130
Earnings before Interest and taxes (EBIT) $3,355
     Financial income $45
Income before interest expense (IBIE) $3,400
     Financial expense $190
Earnings before income taxes (EBT) $3,210
     Income taxes $1,027
Net income $2,138

Earnings before taxes

Earnings before taxes (EBT) is the money retained by the firm before deducting the money to be paid for taxes. EBT includes the money paid for interest. Thus, it can be calculated by subtracting the interest from EBIT (earnings before interest and taxes).

See also

References

  1. ^ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452. ISBN 0-07-251077-3
  2. ^ "Earnings before interest and, taxes (EBIT) definition". Nasdaq.com.
  3. ^ a b "How are EBIT and operating income different?". Investopedia.com.
  4. ^ "What is EBIT? definition and meaning". InvestorWords.com. Retrieved 28 December 2018.
  5. ^ Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.
Altman Z-score

The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.

Aztar

Aztar Corporation was a hospitality company based in Phoenix, Arizona, focused on resort hotels and casinos. In 2005, the company had revenues of more than $915 million and earnings before interest and taxes of $212 million. During 2006 the company became the subject of a bidding war for ownership, with Columbia Sussex winning.

DHL

DHL (Dalsey, Hillblom and Lynn) International GmbH is German company which is now the international courier, parcel, and express mail division of the German logistics company Deutsche Post DHL. Deutsche Post DHL is the world's largest logistics company, particularly in sea and air mail. The company delivers over 1.3 billion parcels per year.The company was founded in the United States in 1969 and expanded its service throughout the world by the late 1970s. The company was primarily interested in offshore and intercontinental deliveries, but the success of FedEx prompted their own intra-US expansion starting in 1983.

In 1998, Deutsche Post began to acquire shares in DHL. It reached controlling interest in 2001, and acquired all outstanding shares by December 2002. The company then absorbed DHL into its Express division, while expanding the use of the DHL brand to other Deutsche Post divisions, business units, and subsidiaries. Today, DHL Express shares its DHL brand with business units such as DHL Global Forwarding and DHL Supply Chain. It gained a foothold in the United States when it acquired Airborne Express.

The DHL Express financial results are published in the Deutsche Post AG annual report. In 2016, this division's revenue increased by 2.7 per cent to €14 billion. The earnings before interest and taxes (EBIT) increased by 11.3% over 2015 to €1.5 billion.

DHL Global Forwarding

DHL Global Forwarding, formerly known as DHL Danzas Air & Ocean, is a division of Deutsche Post DHL providing air and ocean freight forwarding services. It also plans and undertakes major logistics projects under the brand name DHL Industrial Projects.

Together with DHL Freight, it forms Deutsche Post's Freight/Forwarding department.

The Forwarding division carries goods by rail, road, air and sea under the DHL brand and includes the DHL Freight operation which runs a ground-based freight network covering Europe, Russia and traffic into the Middle East. In 2016, this division's revenue declined by 7.7 percent to €13.7 billion but earnings before interest and taxes (EBIT) improved from -€181 million in 2015 to +€287 million.

Deutsche Post

The Deutsche Post AG, operating under the trade name Deutsche Post DHL Group, is a German postal service and international courier service company, the world's largest. With its headquarters in Bonn, the corporation has 510,000 employees. The postal division delivers 61 million letters each day in Germany, making it Europe's largest such company. The Express division (DHL) claims to be present in over 220 countries and territories.The Deutsche Post is the successor to the German mail authority Deutsche Bundespost, which was privatized in 1995 and became a fully independent company in 2000. DHL Express is a wholly owned subsidiary.

Since its privatization, Deutsche Post has significantly expanded its business area through acquisitions.

In late 2014, the Group acquired StreetScooter GmbH, a small manufacturer of electric vehicles. Two years later, the Group acquired UK Mail, a business-focused postal service in the UK for US$315.5 million (£243 million). The former company became a division of the Deutsche Post European parcel network.The Deutsche Post DHL Group 2016 earnings before interest and taxes (EBIT) was €3.491 billion (up 44.8 percent over 2015), with a net profit of €2.64 billion on revenue of €57.334 billion. Return on equity, before taxes, was 27.7 percent. The Group's long term credit rating, in November 2016, was BBB+ with a Stable outlook per Fitch's.Deutsche Post AG is listed on the Börse Frankfurt (Frankfurt Stock Exchange) as DPW and is in the Euro Stoxx 50 stock market index. In 2016, 20.5% of the Group's shares were held by the state-owned KfW bank; 79.5% were freely floating: 65.6% held by institutional and 10.8% by private investors.

DuPont analysis

DuPont Analysis (also known as the dupont identity, DuPont equation, DuPont Model or the DuPont method) is an expression which breaks ROE (return on equity) into three parts.

The name comes from the DuPont Corporation that started using this formula in the 1920s. DuPont explosives salesman Donaldson Brown invented this formula in an internal efficiency report in 1912.

EBIT

EBIT, Ebit or ebit may refer to:

EBIT, or Earnings before interest and taxes, in finance

EBIT, or Electron beam ion trap, in physics

An ebit (quantum state), a two-party quantum state with quantum entanglement and the fundamental unit of bipartite entanglement

Exabit, the symbol for the unit of information storage

EV/EBITDA

Enterprise value/EBITDA (more commonly referred to by the acronym EV/EBITDA) is a popular valuation multiple used in the finance industry to measure the value of a company. It is the most widely used valuation multiple based on enterprise value and is often used in conjunction with, or as an alternative to, the P/E ratio (Price/Earnings ratio) to determine the fair market value of a company.

An advantage of this multiple is that it is capital structure-neutral, and, therefore, this multiple can be used to directly compare companies with different levels of debt.The EV/EBITDA multiple requires prudent use for companies with low profit margins (i.e., for an EBITDA estimate to be reasonably accurate, the company under evaluation must have legitimate profitability).

Often, an industry average EV/EBITDA multiple is calculated on a sample of listed companies to use for comparison to the company of interest (i.e., as a benchmark). An example of such an index is one that provides an average EV/EBITDA multiple on a wide sample of transactions on private companies in the Eurozone.The reciprocate multiple EBITDA/EV is used as a measure of cash return on investment.

Earnings

Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before interest, taxes, depreciation, and amortization.

Many alternative terms for earnings are in common use, such as income and profit. These terms in turn have a variety of definitions, depending on their context and the objectives of the authors. For instance, the IRS uses the term profit to describe earnings, whereas for the corporation the profit it reports is the amount left after taxes are taken out. Many economic discussions use principles derived from Karl Marx and Adam Smith. However the rise of the importance of intellectual capital affects such analyses.

Effective gross income

Effective gross income is the relationship or ratio between the sale price of the value of a property and its effective gross rental income.

The anticipated income from all operations of the real property after an allowance is made for a vacancy and collection losses. Effective gross income includes items constituting other income: income generated from the operation of the real property that is not derived from space rental (such as parking rental or income from vending machines).

For example, if two properties have a potential income of $15,000 if they are all filled to maximum occupancy, and the average vacancy rate of the properties in cash is $1,250 (the sum of the rent that is not coming in by the vacancy in the properties). The average vacancy rate is then subtracted from the potential income from renting the properties so the total is $13,750, which becomes the effective gross income.

Financial ratio

A financial ratio or accounting ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization. Financial ratios may be used by managers within a firm, by current and potential shareholders (owners) of a firm, and by a firm's creditors. Financial analysts use financial ratios to compare the strengths and weaknesses in various companies. If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.

Ratios can be expressed as a decimal value, such as 0.10, or given as an equivalent percent value, such as 10%. Some ratios are usually quoted as percentages, especially ratios that are usually or always less than 1, such as earnings yield, while others are usually quoted as decimal numbers, especially ratios that are usually more than 1, such as P/E ratio; these latter are also called multiples. Given any ratio, one can take its reciprocal; if the ratio was above 1, the reciprocal will be below 1, and conversely. The reciprocal expresses the same information, but may be more understandable: for instance, the earnings yield can be compared with bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20 corresponds to an earnings yield of 5%.

Financial result

The financial result is the difference between earnings before interest and taxes and earnings before taxes. It is determined by the earning or the loss which results from financial affairs.

Free cash flow

In corporate finance, free cash flow (FCF) or free cash flow to firm (FCFF) is a way of looking at a business's cash flow to see what is available for distribution among all the securities holders of a corporate entity. This may be useful to parties such as equity holders, debt holders, preferred stock holders, and convertible security holders when they want to see how much cash can be extracted from a company without causing issues to its operations.

Free cash flow can be calculated in various ways, depending on audience and available data. A common measure is to take the earnings before interest and taxes multiplied by (1 − tax rate), add depreciation and amortization, and then subtract changes in working capital and capital expenditure. Depending on the audience, a number of refinements and adjustments may also be made to try to eliminate distortions.

Free cash flow may be different from net income, as free cash flow takes into account the purchase of capital goods and changes in working capital.

Gross profit

In accounting, gross profit, gross margin, sales profit, or credit sales is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. This is different from operating profit (earnings before interest and taxes). Gross margin is the term normally used in the U.S., while gross profit is the more common usage in the UK and Australia.

The various deductions (and their corresponding metrics) leading from net sales to net income are as follows:

Net sales = gross sales – (customer discounts + returns + allowances)

Gross profit = net sales – cost of goods sold

Gross profit percentage = [(net sales – cost of goods sold)/net sales] × 100%.

Operating profit = gross profit – total operating expenses

Net income (or net profit) = operating profit – taxes – interest(Note: Cost of goods sold is calculated differently for a merchandising business than for a manufacturer.)

Net income

In business and accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses and taxes for an accounting period. It is computed as the residual of all revenues and gains over all expenses and losses for the period, and has also been defined as the net increase in shareholders' equity that results from a company's operations. In the context of the presentation of financial statements, the IFRS Foundation defines net income as synonymous with profit and loss. The difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments. This is different from operating profit (earnings before interest and taxes).A common synonym for net profit when discussing financial statements (which include a balance sheet and an income statement) is the bottom line. This term results from the traditional appearance of an income statement which shows all allocated revenues and expenses over a specified time period with the resulting summation on the bottom line of the report.

In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations or endeavors. The bookkeeper or accountant must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.

Definitions of the term can, however, vary between the UK and US. In the US, net profit is often associated with net income or profit after tax (see table below).

The net profit margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.

It is a measure of the profitability of a venture after accounting for all costs and taxes. It is the actual profit, and includes the operating expenses that are excluded from gross profit.

Net income is usually calculated per annum, for each fiscal year. It is the same as net profit but a distinct accounting concept from profit, i.e. the amount of money the company has made before its company-specific deductions are subtracted. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes."How does a company decide whether it is successful or not? Probably the most common way is to look at the net profits of the business. Given that companies are collections of projects and markets, individual areas can be judged on how successful they are at adding to the corporate net profit."

Net profit

Net profit, also referred to as the bottom line, net income, or net earnings is a measure of the profitability of a venture after accounting for all costs and taxes. It is the actual profit, and includes the operating expenses that are excluded from gross profit.

A common synonym for 'net profit' when discussing financial statements (which include a balance sheet and an income statement) is the bottom line. This term results from the traditional appearance of an income statement which shows all allocated revenues and expenses over a specified time period with the resulting summation on the bottom line of the report.

In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations or endeavors. The bookkeeper or accountant must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.

Definitions of the term can, however, vary between the UK and US. In the US, net profit is often associated with net income or profit after tax (see table below).

The net profit margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.

Profit margin

Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.

Schuler Group

Schuler Aktiengesellschaft is a German company headquartered in Göppingen, Baden-Württemberg which operates in the field of forming technology and is the world's largest manufacturer of presses. The presses are used to create car body sheets and other car parts as well as items such as beverage and aerosol cans, sinks, large pipes, and parts for electric motors.

The company has production sites in Germany, Switzerland, Brazil, USA and China and in addition to the automotive industry and its suppliers, it also supplies the household appliances and electrical industry, the forging, energy, aerospace and railway industries as well as mints.

In total, the company has a presence in 40 countries with its own sites and representatives.As of December 31, 2016, the company employed 6,617 people and in the 2016 fiscal year, it achieved a turnover of €1.2 billion. Earnings before interest and taxes (EBIT) grew in 2015 to €95.4 million, the Group result was €77.4 million.

Schuler AG's shares were listed on the regulated market on the Frankfurt and Stuttgart stock exchanges. When the public float portion fell below 10% in 2012, Schuler fell off the SDAX share index. In 2014 the shares were delisted from the regulated stock exchange; today, the shares are only listed on the open market on the Munich stock exchange.

Sonkin enterprise multiple

The Sonkin enterprise multiple (Sonkin ratio) was named after by Paul D. Sonkin, a graduate of Columbia Business School. This ratio can be used when Value investing, and can be calculated using the following formula:

Sonkin ratio = (market capitalization + debt – cash) / (earnings before interest and taxes – tax)

The Sonkin ratio is an alternative to the P/E ratio (price to earnings ratio) and represents the multiple of operating earnings an investor would pay if using the company's cash. A lower multiple means that an investor will pay less to own the after-tax operating earnings of the business.

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