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, which is reflected in debt to equity. EBIAT measures a company's ability to generate income from its operations for a specified period.

Key Takeaways:

What Is Earnings Before Interest After Taxes (EBIAT)?

  • Earnings before interest after taxes (EBIAT) measures a company's operating performance.
  • EBIAT shows profitability before considering the capital structure and shows the company's ability to generate income for a specified period.
  • EBIAT shows how much cash is available to pay creditors in the event of liquidation.

Understanding Earnings Before Interest After Taxes (EBIAT)

EBIAT takes taxes into account because taxes are viewed as an ongoing expense that is beyond a company's control, particularly if the company is profitable. The calculation of EBIAT removes any tax benefits that might be gained from debt financing. Thus, the measure provides an accurate picture of the company by eliminating all elements that can potentially boost or reduce its financial strength.

EBIAT is not used in financial analysis as often as earnings before interest, taxes, depreciation, and amortization (EBITDA). However, it is monitored as it shows how much cash is available to pay creditors if liquidation becomes necessary. If the company does not have much depreciation or amortization, EBIAT may be more closely watched.

Example of the Earnings Before Interest After Taxes (EBIAT) Calculation

The calculation for EBIAT is 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 period, the company reports a 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 expenses 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 it is not recurring. Whether to include it is at the discretion of the analyst doing the calculation. The decision might depend on the magnitude of the special expense, but these types of line items can have significant implications. 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 including the special expense, the EBIAT for Company X is 9.4% higher, which may have influence decision-makers.