What Is Profit Before Tax?
Profit before tax (PBT) is a measure that looks at a company's profits before the company has to pay corporate income tax. It deducts all expenses from revenue including interest expenses and operating expenses except for income tax.
Profit Before Tax (PBT)
Understanding Profit Before Tax
PBT combines all of the company's profits before tax, including operating, non-operating, continuing operations and non-continuing operations. PBT exists because tax expense is constantly changing, and taking it out helps give an investor a good idea of changes in a company's profits or earnings from year to year. The term is interchangeable with "earnings before tax" or "pretax profit",
EBT may be listed on a company’s income statement. It is typically the third to last line on the income statement as the second to last line is the total income tax expense followed by total net income displayed at the bottom.
Calculation of Profit Before Tax
PBT encompasses all income earned regardless of the source. This includes sales, commissions, service revenue and interest. All expenses are subsequently deducted except for corporate income tax. Additionally, PBT may be calculated by taking the net income of an organization and adding the corporate income tax.
Usefulness of PBT
PBT holds much value in providing internal management and external users of financial data with a company’s operating performance. By excluding income tax, PBT minimizes one additional variable that may hold different indicators that influence the way financial data reads. For instance, one industry may receive substantial tax benefits that will positively influence the net income of one entity, while an entity under unfavorable taxation policies will be negatively influenced. The elimination of income tax expense will allow for a greater comparison of the operations of these two companies regardless of how taxation policies define their bottom lines.
These taxation differences may also exist heavily between companies as the age, capital utilization, and geographical location will play factors in how much income tax a business must pay. PBT eliminates any influence a taxation jurisdiction may have on a company’s financial information. Therefore, PBT is a performance measurement that emphasizes the general operations of a business. Although PBT may be used to compare any companies, it is most useful when utilized within a single industry.
PBT vs. EBIT vs. EBITDA
While PBT contains all expenses except for income tax, earnings before interest and taxes (EBIT) eliminates an additional variable by excluding interest expenses. These two are finer levels to earnings before interest, taxes, depreciation, and amortization (EBITDA). All three calculations are not required to be reported by the Securities and Exchange Commission (SEC) as they in accordance with generally accepted accounting principles (GAAP). However, all three provide deeper insight into a company’s operations depending on how fine of a level is desired.