What is 'Earnings Before Interest After Taxes - EBIAT'
Earnings before interest after taxes (EBIAT) is a financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT, measures a company's profitability without taking into account the capital structure, like ratios such as debt to equity. EBIAT measures a company's ability to generate income from its operations for a specified time period.
!--break--EBIAT takes taxes into account because taxes are viewed as an ongoing expense that is beyond a company's control, especially if it is profitable. EBIAT is not as commonly used in financial analysis as the earnings before interest, taxes, depreciation and amortization (EBITDA) measure, however, it is monitored as it represents cash available to pay creditors if there is ever a liquidation event. If the company does not have much depreciation or amortization, EBIAT may be more closely watched.
Earnings Before Interest After Taxes Calculation and Example
The calculation for EBIAT is very straightforward. It is the company's EBIT x (1 - Tax rate). A company's EBIT is calculated in the following way:
EBIT = revenues - operating expenses + non-operating income
As an example, consider the following. Company X reports sales revenue of $1,000,000 for the year. Over that same time period, the company reports non-operating income of $30,000. The company's cost of goods sold is $200,000, while depreciation and amortization are reported at $75,000. Selling, general and administrative expense are $150,000 and other miscellaneous expenses are $20,000. The company also reports a one-time special expense of $50,000 for the year.
In this example, the EBIT would be calculated as:
EBIT = $1,000,000 - ($200,000 + $75,000 + $150,000 + $20,000 + $50,000) + $30,000 = $535,000
If the tax rate for Company X is 30%, then EBIAT is calculated as:
EBIAT = EBIT x (1 - tax rate) = $535,000 x (1 - 0.3) = $374,500
Some analysts argue that the special expense should not be included in the calculation because is not recurring. It is at the discretion of the analyst doing the calculation whether to include it or not depending on the magnitude of the special, but these types of line items can have large results. In this example, if the one-time special expense is excluded from the calculations, the following numbers would result:
EBIT without special expense = $585,000
EBIAT without special expense = $409,500
Without the special expense included the EBIAT for Company X is 9.4% higher, which may have large implications for decision-makers.