Earnings before interest and taxes is a calculation of the operational earnings of a business. It specifically excludes interest, which is a finance cost, and taxes, which are imposed by a governmental entity. The residual amount is a fair approximation of the current earning power of the operations of a business. The concept is more commonly known by its acronym, which is EBIT.
EBIT can be calculated as the name implies, which is:
The concept should be expanded to also exclude interest income, since this is also not related to operations. Otherwise, a business with a large amount of investments would report an excessive amount of income.
The use of EBIT is common among industry analysts, because they can use it to ignore the financial effects of the differing capital structures of entities within an industry, and focus on their operational results instead.
A key failing of the EBIT concept is that a company may have gone to a considerable amount of trouble to gain a long-term advantage by reducing its tax burden. If so, this could be considered a result of the operational activities of the business. This argument implies that taxes should be considered part of operations.
A publicly-held entity may be tempted to report its EBIT in its reporting to the investment community. This is not encouraged by the Securities and Exchange Commission, which mandates that the reporting of any non-GAAP financial measure must be reconciled back to an appropriate GAAP measure (such as net profits).