Net Operating Income (NOI) vs. Earnings Before Interest and Taxes (EBIT): An Overview

Net operating income (NOI) determines an entity's or property's revenue less all necessary operating expenses. It doesn't take interest, taxes, capital expenditures, depreciation, or amortization expenses into account. Conversely, earnings before interest and taxes (EBIT) consists of revenues minus expenses, excluding taxes and interest, but it does take depreciation and amortization expenses into account. EBIT is a profitability measure for a company.

Key Takeaways

  • Calculating NOI involves subtracting operating expenses from a property's revenues.
  • Calculating EBIT uses the same equation, but depreciation and amortization are included
  • Income taxes do not impact a company's NOI or EBIT, but property taxes are included in the equation.
  • Operating expenses are defined as those expenses that are necessary to maintain revenue and an asset's profitability.

Net Operating Income (NOI)

NOI is generally used to analyze the real estate market and a building's ability to generate income. Real estate property can generate revenues from rent, parking fees, servicing, and maintenance fees. A property might have operating expenses of insurance, property management fees, utility expenses, property taxes, janitorial fees, snow removal and other outdoor maintenance costs, and supplies.

The rule of thumb is to categorize an expense as an operating expense if not spending money on that cost would jeopardize the asset's ability to continue producing income. Income taxes and interest do not impact the potential of a company or real estate investment to make money, so they're not included in NOI.

The NOI equation is gross revenues less operating expenses equals net operating income. NOI also determines a property's capitalization rate or rate of return. A property's capitalization is calculated by dividing its annual NOI by its potential total sale price.

Earnings Before Interest and Taxes (EBIT)

EBIT is calculated by subtracting a company's cost of goods sold (COGS) and its operating expenses from its revenue. EBIT can also be calculated as operating revenue and non-operating income, less operating expenses.

Assume Company ABC generated $50 million in revenue, and it had COGS of $20 million, depreciation expenses of $3 million, non-operating income of $1 million, and maintenance expenses of $10 million during the last fiscal year. Its resulting EBIT was, therefore, $21 million. Its EBIT equation is $50 million (revenue) plus $1 million less $10 million (maintenance expenses) less $20 million (cost of goods sold) equals $21 million.

NOI vs. EBIT Example

Assume an investor purchases an apartment building in an all-cash deal. The property generates $20 million dollars in rents and servicing fees. The apartment building has operating expenses that amount to $5 million and depreciation expenses of $100,000 for its laundry machines.

The resulting NOI generated by the apartment building is $15 million ($20 million less $5 million) because depreciation is not included in this calculation.

The building's EBIT is different because EBIT takes into account the depreciation expense. Therefore, the resulting EBIT generated by this apartment building is $14.9 million ($20 million less $5 million less $100,000).