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.
- 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.
- The key difference between EBIT and operating income is that EBIT includes non-operating income, non-operating expenses, and other income.
- EBIT is often used as an alternative to net income since EBIT shows a company's net income without the cost of interest on debt and tax expenses.
- EBIT and operating income are not always the same since a company can have interest income or other income that inflates EBIT but not operating income.
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 expenses (SG&A), depreciation, 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 and operating income are both important metrics in analyzing the financial performance of a company. However, EBIT and operating income can be different. For example, a company may have interest income such as credit financing, which EBIT would capture, while operating income would not capture interest income.
Also, EBIT strips out the cost of debt (or interest expense), which is deducted from revenue to arrive at net income. By adding back interest expense to net income to arrive at EBIT, we can see net income without the cost of debt. This can be helpful when comparing the profitability of two similar companies, one of which has debt while the other doesn't.
Operating income is also important because it shows the revenue and cost of running a company without non-operating income or expenses, such as taxes, interest expenses, and interest income. Operating income helps investors to determine if a management team is running the company properly and allows for comparison to other similar companies within the same industry.
It's best to use multiple metrics such as EBIT, operating income, and net income to analyze a company's profitability. It's also helpful to compare multiple quarters or years when determining if there are any trends in a company's financial performance.
EBIT vs. Operating Income Example
Below is a portion of the income statement for Tesla Inc. (TSLA) for the years ending 2021 and 2020 as reported via the company's annual 10-K filing on Dec. 31, 2021.
- Operating income was $6.523 billion in 2021, highlighted in blue.
- Net income was $5.644 billion, highlighted in green.
- Interest expense was $371 million while tax expense was $699 million, highlighted in yellow.
- EBIT was $6.714 billion for 2021, or $5.644 billion (net income) + $699 million (taxes) + $371 million (interest).
We can see in the above example that the 2021 operating income of $6.523 billion was less than the EBIT of $6.714 billion. The reason for the difference is that operating income does not include non-operating income, such as interest income and other income, but they're included in net income, which is used as the starting point in the EBIT formula. The difference between the two numbers highlights the importance of not assuming that operating income will always equal EBIT.
In 2020, EBIT was $1.9 billion, or $862 million (net income) + $292 million (taxes) + $748 million (interest). The 2020 EBIT figure was much lower than 2021 primarily due to the coronavirus pandemic. We can also see that 2020 operating income was $1.994 billion—again, much lower than the $6.523 billion in 2021.
What Does EBIT Stand For?
EBIT stands for Earnings Before Interest and Taxes and represents a company's net income (or profit) before interest on debt and income tax expenses have been deducted.
What Are the Main Differences Between Operating Income and EBIT?
Operating income is a company's income after subtracting operating expenses and other costs from total revenue. Operating income shows the income generated from a company's operations. EBIT is essentially net income with interest and tax expenses added back to establish a company's overall profitability by excluding the cost of debt and taxes. However, EBIT includes interest income and other income, while operating income does not.
Do You Calculate EBIT Using Operating Income and Interest Expense?
Operating income is not used in the EBIT calculation, but interest expense is included. Both interest and tax expenses are added back to net income because net income has those expenses deducted to arrive at net income.