What is Ebit? Ebit calculation formula in corporate financial management

What is Ebit ? Ebit index in corporate financial management is calculated by what formula? In the article below, let's join 1C Vietnam to learn detailed information about the definition, calculation and outstanding applications of this index in businesses.

1. What is Ebit?

Ebit (Earnings Before Interest and Taxes) is understood as a business's profit before taxes and interest. This is the profit a company earns from its business, excluding interest payments and corporate income taxes.

Ebit is used to evaluate a business's profitability. Thanks to this index, when analyzing the finances of a business, one can eliminate differences in capital structure and corporate income tax rates.

2. What is the meaning of Ebit index?

Currently, Ebit is a factor that many businesses pay attention to and calculate. This is a commonly used index when evaluating the financial health of a business. Specifically:

• Ebit helps focus on a business's ability to generate profits from its core business by eliminating two costs: interest costs related to debt (i.e. capital structure) and costs related to taxes (i.e. corporate income taxes or other taxes that businesses must pay based on business operating profits).
• Ebit is used to evaluate a company's performance, including financial management ability, business projects to generate profits as well as debt repayment ability and capital resources to maintain and develop plans. Future.
• Ebit is also used to compare two or more companies in the same business line but with different income tax rates. Profit and pre-tax profit indicators provide the most objective perspective on a company's operating efficiency and future development potential.

3. Formula to calculate Ebit

To calculate the Ebit index, businesses can apply the following formula:

Ebit = Total revenue – Operating expenses

However, in Vietnam, calculating operating costs is very difficult because interest costs are included in financial costs. Therefore, Ebit also has the following alternative formula:

Ebit = Profit before tax + Interest expense

Or businesses can also use another expression:

Ebit = Profit after tax + Corporate tax + Interest expense.

For example: Company B has operating revenue of 100 billion VND, production and business costs of 50 billion VND and interest expenses of 2 billion VND. The company's pre-tax profit is 48 billion VND. Corporate tax (20%) is 9.6 billion VND. Profit after tax = Profit before tax – Corporate tax = 48 billion – 9.6 billion = 38.4 billion

Thus, through the above Ebit calculations, it can be seen:

• Ebit = Total revenue – Operating expenses = 100 billion - 50 billion = 50 billion
• Ebit = Profit before tax + Interest expense = 48 billion + 2 billion = 50 billion
• Ebit = Profit after tax + Corporate tax + interest expense = 38.4 billion + 9.6 billion + 2 billion = 50 billion

4. Outstanding applications of Ebit

4.1. Calculate Ebit Margin

Ebit Margin or pre-tax profit margin is a financial measure of a company's effectiveness in managing operating costs such as sales, logistics, corporate administration, etc.

Ebit margin = Ebit/Net revenue

If a business continuously maintains a high Ebit margin (15% or more), it means that the company is managing costs very well.

4.2. Calculate your ability to pay interest

Based on the Ebit index, businesses can calculate the ability to pay interest through the formula:

Interest payment capacity = Ebit/Cost of borrowing.

The higher the value of this index, the better the company's ability to pay interest and vice versa.

4.3. Valuing businesses or corporate stocks

In addition to calculating Ebit margin or interest payment ability, the Ebit index is also used in business valuation with the formula: EV/Ebit.

In which: Enterprise value (EV) = Total equity value + Short-term and long-term financing + Minority interests + Market value of preferred shares - Cash and cash equivalents .

This ratio is considered good when it is low and vice versa

4.4. Calculated in the 5-factor Dupont model

DuPont's five-factor model is used to analyze the components that affect a business's production and operations results. Those five factors include:

• Debt ratio = Profit after tax/Profit before tax.
• Interest expense = Profit before tax/Ebit.
• Ebit margin = Profit before tax/Net revenue.
• Total asset turnover = Net profit/Average value of total assets.
• Average asset value/Average stock value.

Above, 1C Vietnam has shared details about the definition of Ebit as well as the meanings, applications and formulas for calculating this index in corporate financial management. To update useful information about operations management, businesses should not forget to follow other useful articles on 1C Vietnam's website.