What is 'Earnings Before Tax - EBT'

Earnings before tax (EBT) is an indicator of a company's financial performance, calculated as revenue minus expenses, excluding tax. EBT is a line item on a company's income statement that shows how much the company has earned after the cost of goods sold (COGS), interest, depreciation, general and administrative expenses and other operating expenses have been subtracted from gross sales.

BREAKING DOWN 'Earnings Before Tax - EBT'

EBT can be thought of as the money retained internally by a company, prior to deducting the money due to the government in the form of taxes. It is an accounting measure of a company's operating and non-operating profits.

Deriving a Company's EBT

All companies calculate their EBT in the same manner. Since it is a "pure ratio," meaning that it uses numbers found exclusively on the income statement, analysts and accountants derive EBT through that specific financial statement. A company first records its revenue as the top line number. If, for example, a company sells 30 widgets for $1,000 a piece during the month of January, its revenue for the period is $30,000. The company then assesses its COGS, subtracting that number from $30,000. If it costs the company $100 to produce a single widget, its COGS for January is $3,000. This means that its gross revenue is therefore $27,000.

After a company finds its gross revenue, it tallies all its operating costs together and subtracts it from the gross number, in this case $27,000. The operating costs of a company can include any expenses related to its daily activities, such as salary and wages, rent and other overhead costs. If the company is a technology company with heavy investments in human capital, it might have salaries of $10,000 a month and monthly rent of $1,000. This means that it would subtract $11,000 in total overhead from its gross revenue number of $27,000, giving it an earnings before, interest, tax, depreciation and amortization (EBITDA) of $16,000.

Assuming the company owns no physical assets, instead choosing to rent computers and server space from Amazon, its earnings before interest and taxes (EBIT) would also equal $16,000. If it has $1,000 of monthly interest expenses, its EBT would therefore be $15,000.

EBT as a Tool for Comparisons

EBT is important because it removes the effects of taxes. For example, while U.S.-based corporations face the same tax rates at the federal level, they face different tax rates at the state level. Since companies may pay different tax rates in different states, EBT allows investors to compare the profitability of similar companies in different tax jurisdictions. Further, EBT is used to calculate performance metrics, such as pretax profit margin.

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