What is 'Earnings Before Tax - EBT'

Earnings before tax (EBT) is an indicator of a company's financial performance, calculated as revenue minus expenses, excluding tax. EBT is a line item on a company's income statement that shows how much the company has earned after the cost of goods sold (COGS), interest, depreciation, general and administrative expenses and other operating expenses have been subtracted from gross sales.

BREAKING DOWN 'Earnings Before Tax - EBT'

EBT can be thought of as the money retained internally by a company, prior to deducting the money due to the government in the form of taxes. It is an accounting measure of a company's operating and non-operating profits.

Deriving a Company's EBT

All companies calculate their EBT in the same manner. Since it is a "pure ratio," meaning that it uses numbers found exclusively on the income statement, analysts and accountants derive EBT through that specific financial statement. A company first records its revenue as the top line number. If, for example, a company sells 30 widgets for $1,000 a piece during the month of January, its revenue for the period is $30,000. The company then assesses its COGS, subtracting that number from $30,000. If it costs the company $100 to produce a single widget, its COGS for January is $3,000. This means that its gross revenue is therefore $27,000.

After a company finds its gross revenue, it tallies all its operating costs together and subtracts it from the gross number, in this case $27,000. The operating costs of a company can include any expenses related to its daily activities, such as salary and wages, rent and other overhead costs. If the company is a technology company with heavy investments in human capital, it might have salaries of $10,000 a month and monthly rent of $1,000. This means that it would subtract $11,000 in total overhead from its gross revenue number of $27,000, giving it an earnings before, interest, tax, depreciation and amortization (EBITDA) of $16,000.

Assuming the company owns no physical assets, instead choosing to rent computers and server space from Amazon, its earnings before interest and taxes (EBIT) would also equal $16,000. If it has $1,000 of monthly interest expenses, its EBT would therefore be $15,000.

EBT as a Tool for Comparisons

EBT is important because it removes the effects of taxes. For example, while U.S.-based corporations face the same tax rates at the federal level, they face different tax rates at the state level. Since companies may pay different tax rates in different states, EBT allows investors to compare the profitability of similar companies in different tax jurisdictions. Further, EBT is used to calculate performance metrics, such as pretax profit margin.

RELATED TERMS
  1. Profit Before Tax - PBT

    A profitability measure that looks at a company's profits before ...
  2. Accounting Profit

    A company's total earnings, calculated according to Generally ...
  3. Electronic Benefit Transfer - EBT

    A system that allows state governments to provide and track benefits ...
  4. Operating Earnings

    Profit earned after subtracting from revenues those expenses ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  6. Gross Earnings

    1. For individuals, the total income earned in a year, as calculated ...
Related Articles
  1. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  2. Taxes

    What is Profit Before Tax?

    Profit before tax measures a company’s profits before it pays corporate income tax.
  3. Investing

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  4. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  5. Taxes

    What is Gross Income?

    Gross income is an individual’s total income before taxes and other adjustments are considered.
  6. Investing

    Understanding the Income Statement

    The best way to analyze a company—and figure out if it's worth investing in—is to know how to dissect its income statement. Here's how to do it.
  7. Taxes

    Calculating Net of Tax

    Net of tax is a figure that has been adjusted for taxes.
  8. Investing

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
  9. Investing

    What's a P&L Statement?

    A profit and loss statement, also called the income statement, is a financial statement that companies use to report their income and expenses for a quarter or a year.
RELATED FAQS
  1. What is the difference between EBIT and EBT?

    Take a closer look at the different calculations and uses of EBT and EBIT, two non-GAAP figures used to compare profitability ... Read Answer >>
  2. What is the difference between earnings and revenue?

    Understand how a company makes revenue and how it makes earnings. Learn the difference between revenue and earnings and how ... Read Answer >>
  3. How are effective tax rates calculated from income statements?

    Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >>
  4. What is the difference between revenue and cost in gross margin?

    Discover the differences between revenue and cost in gross margin, along with an explanation of various measures of profitability. Read Answer >>
  5. How does product pricing affect gross profit and EBITDA?

    Learn about how changes in product pricing can affect a company's revenue and profitability, including examples of this effect ... Read Answer >>
  6. What is the difference between gross margin and operating margin?

    Understand the difference between gross margin and operating margin in relation to evaluating a company's overall profitability ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center