EBIT vs. Operating Income: An Overview
Earnings before interest and taxes (EBIT) and operating income are terms that are often used interchangeably, although there is a notable difference between the two, which can cause the numbers to yield different results. The key difference between EBIT and operating income is that operating income does not include non-operating income, non-operating expenses, or other income.
- The key difference between EBIT and operating income is that EBIT includes non-operating income, non-operating expenses, and other income.
- EBIT is net income before interest and income taxes are deducted.
- Operating income is a company’s gross income less operating expenses and other business-related expenses, such as SG&A and depreciation.
Earnings Before Interest and Taxes (EBIT)
Earnings before interest and taxes (EBIT) is a company's net income before interest and income tax expenses have been deducted. EBIT is often considered synonymous with operating income, although there are exceptions.
Investors and creditors use EBIT to analyze the performance of a company's core operations without tax expenses and capital structure costs distorting the profit numbers. EBIT is calculated as follows:
EBIT = Net income + interest expense + tax expense
Since net income includes the deductions of interest expense and tax expense, they need to be added back into net income to calculate EBIT.
EBIT is valuable to investors and analysts when analyzing the performance of a company's core operations.
Operating income is a company's gross income after subtracting operating expenses and the other costs of running the business from total revenue. Operating income shows how much profit a company generates from its operations alone without interest or tax expenses. Operating income is calculated as:
Operating Income = Gross income - operating expenses
Operating expenses include selling, general and administrative expense (SG&A), depreciation, and amortization, and other operating expenses. Operating income excludes taxes and interest expenses, which is why it's often referred to as EBIT. However, there are times when operating income can differ from EBIT.
EBIT vs. Operating Income Example
Below is a portion of the income statement for Macy's Inc. (M) quarter ending May 5, 2018.
- Operating income was $238 million, highlighted in blue.
- Net income was $131 million, highlighted in green.
- Interest expense was $71 million while tax expense was $52 million, highlighted in red.
- EBIT was $254 million for the period, or $131 million (net income) + $52 million (taxes) + $71 million (interest).
We can see in the above example that operating income of $238 million was different from EBIT of $254 million for the quarter ($131 million + $71 million + $52 million). The reason for the difference is that operating income does not include non-operating income, non-operating expenses, or other income, but those numbers are included in net income, and thus included in EBIT. The difference between the two numbers highlights the importance of not assuming that operating income will always equal EBIT.
In the case of Macy's, we can see there was a benefit plan credit of $11 million and interest income of $5 million, resulting in a $16 million difference between operating income and EBIT calculations.
EBIT and operating income are both important metrics in analyzing the financial performance of a company. The example shows the importance of using multiple metrics in analyzing the profitability of a company.
For example, a company may have interest income as a key driver of revenue such as credit financing whereby EBIT would capture the interest income while operating income would not.