What Is Earnings Before Tax (EBT)?
Earnings before tax (EBT) is a measure of financial performance. It reveals a company's earnings before taxes are deducted, is calculated by subtracting all expenses excluding taxes from revenue, and appears as a line item in the income statement.
EBT is sometimes also called pre-tax income, profit before tax, or income before income taxes.
- Earnings before tax (EBT) is a calculation of a firm's earnings before taxes are deducted.
- It is calculated by subtracting all expenses excluding taxes from revenue and can be found in a company's income statement.
- EBT is an important figure because it removes the effects of taxes when comparing businesses and can reflect a firm's performance when compared with industry peers.
Understanding Earnings Before Tax (EBT)
EBT is the money retained internally by a company before deducting tax expenses. It is an accounting measure of a company's operating and non-operating profits.
All companies calculate EBT in the same manner and it is a "pure ratio," meaning it uses numbers found exclusively in the income statement. Analysts and accountants derive EBT through that specific financial statement, deducting the cost of goods sold (COGS), interest, depreciation, general and administrative expenses, and other operating expenses from gross sales.
EBT sometimes appears as income before income taxes or something similar and can be found just above the net income line item.
Example of Earnings Before Tax (EBT)
If a company sells 30 widgets for $1,000 a piece during January, its revenue for the period is $30,000. The company then assesses its COGs and subtracts that number from the $30,000 revenue. 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 $27,000 ($30,000 - $3,000 = $27,000).
After a company determines its gross revenue, it tallies all its operating costs together and subtracts that figure from the gross. The operating costs of a company may include any expenses related to its daily activities, such as salary and wages, rent, and other overhead expenses.
If the company is a technology company with substantial investments in human capital, it might have salaries of $10,000 a month and monthly rent of $1,000. Subtract that $11,000 in total overhead from its gross revenue as well as $1,000 of interest expenses, and you're left with EBT of $15,000.
Earnings Before Tax (EBT) as a Tool for Comparison
EBT is crucial because it removes the effects of taxes when comparing businesses. For example, while U.S.-based corporations face the same tax rates at the federal level, they may 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 various tax jurisdictions. Further, EBT is used to calculate performance metrics, such as pretax profit margin.
How to Calculate Earnings Before Tax (EBT)?
EBT can be calculated in the following ways:
- Revenue – all operating expenses, including the cost of goods sold, selling, general and administrative expenses, and depreciation and amortization
- EBIT – interest expense
- Net income + taxes
Is Earnings Before Tax (EBT) the Same as Income Before Tax?
Yes. Income before tax or pretax income means the same thing as earnings before tax and these terms can be used interchangeably.
What Is the Difference Between Earnings Before Tax (EBT), EBIT, and EBITDA?
EBIT and EBITDA add additional layers of comparability by adding back more stuff. Whereas EBT just adds tax expenditures to net income, EBIT adds back interest expenses as well. And EBITDA goes another step further by also adding back depreciation and amortization. Why is that? Because interest and depreciation and amortization, like taxes, are expenses that don’t necessarily reflect a company’s ability to generate earnings from its operations.
The Bottom Line
EBT is a useful way to compare the profitability of similar companies operating in different tax jurisdictions. Tax rates do not reflect performance and can vary considerably across borders, making EBT a more effective metric than net income when seeking to gauge a company’s ability to generate earnings from its operations relative to its peers.