The goal in the earnings before interest and taxes portion of the income statement is to account for all the costs and revenues from activities that aren’t related to the company’s normal operations. This information enables the company to make smart financial decisions on debt and so it knows how much to pay in taxes.
The final calculation in this portion is called earnings before interest and taxes (EBIT), and it includes the following elements:
Other income: This includes anything the company does other than its main business that generates income. For example, a company that has an extra office in its building that it isn’t using can rent that office out to others, thereby generating other income.
Similarly, a company can sell off a piece of old equipment to buy new equipment. The money it makes by selling the old equipment falls into the other income category.
Other expenses: This includes anything the company does other than its main business that incurs costs. As with other income, other expenses can vary widely. If a company spends or loses money that doesn’t belong in any other category, it counts here.
Taxes are one of the most common other expenses a company incurs. Companies can include any taxes they must pay, other than income taxes, in this portion. Income taxes go in the net income portion of the income statement (see the next section).
Profit/loss for discontinued operations: Any time a company decides to stop pursuing one or more of its operations, the amount of profit or loss experienced from stopping, as well as the amount generated from running those operations up until that point, goes here.
In other words, if a company is losing money on some operation and it decides to stop that operation halfway through the period, the amount of money the company lost up until that period would be included here. In addition, any money the company received from selling the equipment for that operation or paying off lawsuits for the operation would be included here.
You calculate EBIT by taking gross margin and then subtracting or adding the different sources of costs and revenues associated with nonprimary business operations. Essentially, earnings before interest and taxes is the total amount the company made before lenders and the government get their hands on the company’s profits.
It’s an important value for companies and investors to consider because this income statement item shows how much money the company is making and how much it has to pay in taxes. For example, a company that’s making less money this year than last year will pay less taxes.
So, all in all, the earnings before interest and taxes determine whether a company is able to make money the way it’s currently operating.
