What Is Earnings Before Interest and Taxes (EBIT)? A Simple Guide for Small Business

Earnings before interest and taxes (EBIT) is the profit your business makes from its operations, before you subtract interest on debt and income tax. It shows how the business itself performed, separate from how it's financed and taxed. On an income statement where interest and taxes are the only items below operating income, it's the same figure as operating income.

OpenStax's open textbook Principles of Finance 2e describes EBIT as "the available earnings before interest and taxes (EBIT) are deducted," and says "These earnings are considered the operating income" (OpenStax, section 6.4, opened October 29, 2026).

How to calculate EBIT

There are two routes, both from the profit and loss statement:

1. Starting from revenue: revenue minus cost of goods sold gives gross profit, and gross profit minus operating expenses gives operating income, which is EBIT. Principles of Finance 2e says "other operating expenses are deducted in order to calculate the firm's income from operations" (OpenStax, section 5.1).
2. Starting from net income: add interest expense and income tax expense back to net income.

EBIT = Net Income + Interest Expense + Income Tax Expense

OpenStax gives the related EBITDA formula as "EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization." EBIT is the same calculation without adding back depreciation and amortization.

The two routes give the same answer when interest and income tax are the only items between operating income and net income. OpenStax notes that the items deducted from operating income to reach net income can include "interest expense, gains/losses, and income tax expense." If your income statement has gains or losses below operating income, the bottom-up figure will differ from operating income by that amount; ask your accountant which to use.

Sample EBIT calculation

This is a sample with invented figures for a fictional business, Birch Street Bakery, for one year.

Income statement

• Revenue: $420,000.00
• Cost of goods sold: $180,000.00
• Gross profit: $420,000.00 − $180,000.00 = $240,000.00
• Operating expenses: rent $36,000.00 + wages $110,000.00 + utilities $9,000.00 + depreciation $15,000.00 = $170,000.00
• Operating income (EBIT): $240,000.00 − $170,000.00 = $70,000.00
• Interest expense: $6,000.00
• Income before tax: $70,000.00 − $6,000.00 = $64,000.00
• Income tax expense: $14,000.00
• Net income: $64,000.00 − $14,000.00 = $50,000.00

Check starting from net income

• Net income $50,000.00 + interest $6,000.00 + income tax $14,000.00 = $70,000.00

Both routes give $70,000.00, because the bakery has no gains or losses below operating income.

Using EBIT: times interest earned

Principles of Finance 2e uses EBIT in the times interest earned ratio, EBIT divided by interest expense. For the bakery, that's $70,000.00 ÷ $6,000.00 = 11.67, so operating income covers interest expense about 11.7 times.

EBIT and EBITDA

EBITDA adds depreciation and amortization back to EBIT. OpenStax says "Since EBITDA removes the effects of noncash items from the net income equation, it is considered a useful measure in assessing the cash flows provided by operating activities."

EBIT and gross profit

Gross profit subtracts only the cost of goods sold. EBIT also subtracts operating expenses such as rent, wages and utilities. OpenStax says "operating income reflects how profitable the firm's daily operations were as a whole."

Where Billed fits

Billed's expense tracking page says "the income vs expense report compares income with expenses so you can see how profitable the business is," and that reports "can be filtered by date range and exported for your accountant, bookkeeper or tax software." Interest and income tax are separate lines in your accounting records, so work out EBIT from your full profit and loss statement.

Related Articles

• What is Net Income?
• Operating Income
• What is Gross Profit?
• What is Operating Margin?
• What Is the Debt-to-Equity Ratio?

Frequently Asked Questions

How do you calculate EBIT?

Start with net income and add back interest expense and income tax expense. Or start with revenue, subtract cost of goods sold to get gross profit, then subtract operating expenses to get operating income. If there are no gains or losses below operating income, both give the same number.

Is EBIT the same as operating income?

OpenStax's Principles of Finance 2e says earnings before interest and taxes are considered the operating income. If your income statement has gains or losses below operating income, the figure you get by adding interest and taxes back to net income will differ by that amount.

What is the difference between EBIT and EBITDA?

EBITDA adds depreciation and amortization back to EBIT. OpenStax says: "Since EBITDA removes the effects of noncash items from the net income equation, it is considered a useful measure in assessing the cash flows provided by operating activities."

What is EBIT used for?

It shows profit from operations before financing and taxes, so you can compare years when your borrowing or tax changes. Lenders also use it in the times interest earned ratio, which divides EBIT by interest expense.