How to Analyze EBIT

To analyze EBIT means to analyze the actual profitability of any company. EBIT means earning before interest and taxes. We know that net profit is the difference between total incomes and total expenses. So, in the company, we deduct both interest and expenses. But interest and tax payments should be excluded for comparing the profitability level of two or more companies because different companies pay interest and tax at different rates. So, better is to add the interest and tax back to the net profit.

Following is the Simple Formula of EBIT

= NET PROFIT + Interest + Taxes

We can also say EBIT as net operating income because because we try to best to include only operating income and operating expenses in it. So, its relationship will be with sales and operating expenses only. If sales level will increase EBIT will increase.

Now, we Analyze EBIT. There are two main points of Analysis of EBIT :

1. Compare the Profitability of Two or More Companies 

For example, there are two companies A and B. Suppose A company's EBIT is $ 45000 and B company's EBIT is $ 50,000. Company B will be better than company A because company b is getting more return from his operation. So, to invest in b company is better for a new investor. Company A should listen the techniques of company b for decreasing the cost of operation and increasing the sale.

2. Choose the Best Option for Getting New Fund

For example, a company wants to get $50,000 for business promotion. There are three option for this. Company can

 a) Issue new equity shares shares

 b) Company can issue new preference shares

 c) Company can get loan by issuing debentures.

 Now, a good finance manager will take this decision after analysis EBIT. If EBIT is at good level, to get debt will be cheap from taking the fund through issuing new equity or preference shares because we have to give only interest on the debt and our share capital will be same, it means, earning per share will be maximum.