Earnings Before Interest After Taxes (EBIAT) Overview

Earnings Before Interest After Taxes (EBIAT)

Investopedia / Crea Taylor

What Is Earnings Before Interest After Taxes (EBIAT)?

Earnings before interest after taxes (EBIAT) is one of a number of financial measures that are used to evaluate a company's operating performance for a quarter or a year.

EBIAT measures a company's profitability without taking into account its capital structure, which is the combination of debt and stock issues that is reflected in debt to equity. EBIAT is a way to measure a company's ability to generate income from its operations for the period being examined while considering taxes.

EBIAT is the same as after-tax EBIT,

Key Takeaways:

  • Earnings before interest after taxes (EBIAT) measures a company's operating performance for a given period or over time.
  • EBIAT omits the company's capital structure as a factor.
  • EBIAT reveals how much cash a company has available to pay its creditors in the event of a liquidation.

Understanding EBIAT

EBIAT is not used in financial analysis as commonly as other measures, notably interest, taxes, depreciation, and amortization (EBITDA). It is primarily monitored as a way of tracking how much cash a company has available to pay its debt obligations. If the company does not have much depreciation or amortization, EBIAT may be more closely watched.

EBIAT takes taxes into account 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's finances by eliminating elements that can potentially boost or reduce its financial strength.

Example of 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 the 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 would 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.