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.

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.

Formula
where
 * EBIT = (net income) + interest + taxes = EBITDA – (depreciation and amortization expenses)
 * operating income = (gross income) – OPEX = EBIT – (non-operating profit) + (non-operating expenses)
 * EBITDA = earnings interest, taxes, depreciation, and amortization
 * OPEX = operating expense

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 versus equity (equity value).

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