What is EBIT?

This term responds to the acronym in English Earnings Before Interest and Taxes (profit before interest and taxes, in Spanish). Without a doubt, it is one of the most relevant indicators of the company, especially when talking about the financial statements and accounting as they allow us to make a comparison of business results between entities.

Basically, it is an indicator of the operating result of a business entity that does not take into account income or financial costs (interest), or the tax burden on the company, which will mainly depend on the Corporation tax (tax rate).

It is important to know that it is not a particularly important magnitude for companies since, ultimately, the information that investors want to know is the profit that results after taxes and financial costs, a result that constitutes the final profit that must be distributed among the shareholders.

However, EBIT has greater weight depending on the country (the tax burden), and the way of financing the asset; This relevant weight falls, for example, when comparing the profit of different companies. Although the final benefit between companies may be the same, it does not mean that we are in the same situation. Since to give an example; if we talk about two companies located in Spain or Belize, respectively; the Spanish company will have more merit due to the higher tax burden. Similarly, another assumption in which the EBIT may vary is when analyzing how many funding resources are own and how many external.

In this line, EBIT is considered an excellent indicator to calculate the capacity of a company to obtain benefits. Obviously, taking out of the calculation the negative repercussion that the interest rates in case of a debt. In addition, it allows comparisons between companies without taking into consideration either the country in which the activity takes place or the way in which the financing was obtained.

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