UK Accounting Glossary
Earnings before interest and pretax operating income and pretax operating profit are the same. Earnings before interest is revenue less after-tax operating expenses. Earnings before interest can be calculated by subtracting cost of sales and selling, general and administrative expenses and taxes from sales. Earnings before interest and taxes, or EBIT, measures a company’s earning power from ongoing operations making comparisons across time frames or between companies easier. Earnings before interest in this same manner measures the after-tax operating profit of a company’s after-tax cash flow for the same purpose but without the additional tax-neutralized feature. Like EBDITA, earnings before interest is accounting neutral: earnings before interest lets investors compare the profitability of companies with different accounting treatments and the same tax rates. Earnings before interest is finance-neutral with respect to interest charges. Earnings before interest is core recurring profit before other charges are added back to in order to calculate EBITDA. Earnings before interest multiples are often used with EBDITA multiples. For example, EBDITA/interest expense might be 2.5x while EBIT/interest expense was 1.5x and earnings before interest were 1.2x.
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This glossary post was last updated: 9th February 2020.