Michael Taillard

Article / Updated 08-02-2022

Everything that makes up a corporation and everything a corporation owns, including the building, equipment, office supplies, brand value, research, land, trademarks, and everything else, are considered assets. Believe it or not, when you start a corporation, that company’s assets aren’t just included in a Welcome Letter; you have to go out and acquire them. Generally speaking, you start off with cash, which you then use to purchase other assets. For most new companies, this cash consists of a combination of the following: The owner’s own money: This money is considered equity because the owner can still claim full possession over it. Small loans, such as business and personal loans from banks, business and personal lines of credit, and government loans: The money obtained through loans is considered a liability because the corporation has to pay it back at some point. In other words, these loans are a form of debt. The combination of these two funding sources leads to the explanation of the most fundamental equation in corporate finance: Assets = Liabilities + Equity The total value of assets held by a company is equal to the total liabilities and total equity held by the company. Because the total amount of debt a company incurs goes into purchasing equipment and supplies, increasing debt through loans increases a company’s liabilities and total assets. As an owner contributes his own funding to the company’s usage, the total amount of company equity increases along with the assets. Note: Capital, assets, money, and cash are basically all the same thing at this point; after a company raises the original capital, or cash, it exchanges that cash for more useful forms of capital, such as erasable markers. Unlike liabilities, equity represents ownership in the company. So if a company owns $100,000 in assets and $50,000 was funded by loans, then the owner still holds claim over $50,000 in assets, even if the company goes out of business, requiring the owner to give the other $50,000 in assets back to the bank. For corporations, the equity funding varies a bit, however, because the owners of a corporation are the stockholders. The equity funding of corporations comes from the initial sale of stock, which exchanges shares of ownership for cash to be used in the company.

Cheat Sheet / Updated 12-07-2021

Corporate finance is the study of how groups of people work together as a single organization to provide something of value to society. It’s the job of those in corporate finance to manage the organization so that resources are efficiently utilized, the most valuable projects are pursued, the corporation can remain competitive, and everyone gets to keep their job.

Article / Updated 03-26-2016

Everything that makes up a corporation and everything a corporation owns, including the building, equipment, office supplies, brand value, research, land, trademarks, and everything else, are considered assets. Generally speaking, when you start a corporation, you start off with cash, which you then use to purchase other assets. The total value of assets held by a company is equal to the total liabilities and total equity held by the company. Here is the most fundamental equation in corporate finance: Assets = Liabilities + Equity Because the total amount of debt a company incurs goes into purchasing equipment and supplies, increasing debt through loans increases a company’s liabilities and total assets. As an owner contributes his own funding to the company’s usage, the total amount of company equity increases along with the assets. Unlike liabilities, equity represents ownership in the company. So if a company owns $100,000 in assets and $50,000 was funded by loans, then the owner still holds claim over $50,000 in assets, even if the company goes out of business, requiring the owner to give the other $50,000 in assets back to the bank. For corporations, the equity funding varies a bit, however, because the owners of a corporation are the stockholders. The equity funding of corporations comes from the initial sale of stock, which exchanges shares of ownership for cash to be used in the company.

Article / Updated 03-26-2016

You've decided that a career in corporate finance is absolutely your life's calling, so what do you do next? You need to bone-up on some essential mathematical and computer skills that not everyone warns you about when you first begin your journey into corporate finance. Whether you're pursuing your college degree or a professional certification, these skills tend to be sorely neglected, leaving many completely unprepared for the workplace. Going to college can give you the research and problem-solving skills you'll need, but it frequently doesn't give you the specific applied skills needed for the labor market. In addition to your education, supplement by getting some entry-level on-the-job experience, or doing an internship/apprenticeship under an experienced professional. You'll be glad you did! Math skills Corporate finance uses, more than anything else, a lot of math. The majority of it is quite simple, but it's still math, so corporate finance is particularly ideal for those who are numerically inclined. Specifically, you need to excel at a few fields of math: Arithmetic: You'll constantly use addition, subtraction, multiplication, and division. Algebra: You need to be able to find X, because you'll need to do so quite frequently. Statistics and Probability: Be certain you know this stuff — the math of uncertainty — if you want any hope of analyzing investments or risk. You won't see statistics and probability in entry-level jobs, but you'll definitely need these skills to get promoted. Calculus: You'll see calculus less frequently than the other fields, but it's a crucial component to maximization and optimization equations, plus many forecasting analyses. In other words, you'll need calculus if you plan to become an analyst. Computer skills Even if you become the best mathematician in the world, unless you have some specific computer skills, you're still useless in the field of corporate finance. The reason is simply that the amount of data that must be recorded, processed, and communicated is absolutely massive. It's definitely possible to keep track of all this data with pen and paper, but it would take prohibitively huge amount of time. As a result, pretty much every finance job on the planet requires you to have a minimum of specific computer skills. You should know how to use all of the following: Microsoft PowerPoint Microsoft Word Any Internet browser Any e-mail client You also need to learn at least one software package of the following types: Data analytics software (SPSS, SAS, and Microsoft Excel) Accounting software (Quicken, Sage, and Peachtree) Financial management software (JD Edwards, Hyperion, and Quantrix) Database software (MySQL, Access, and Oracle)

Article / Updated 03-26-2016

Behavioral finance was developed as the result of the need to explain how corporations and the people within them behave, driving an overlap between the fields of finance and psychology. Very broadly speaking, behavioral finance looks at the actions and reactions made by people in order to determine how to better understand them and make better decisions. After identifying the role that an individual plays in the financial world and recognizing what behavioral anomalies each individual is subject to, you can make estimates on the cost of behavioral anomalies and take steps to mitigate the risk that such behaviors will occur. Formalizing and quantifying the role of human behavior in causing deviations from rational financial decisions is a relatively new but very important step to not only understanding but also improving upon the current financial infrastructure of organizations. Here are few behaviors to keep in mind: Making financial decisions is rarely entirely rational. Most economic models, financial and otherwise, assume that people act unemotionally and with a certain degree of competence, but in reality, people are emotional, illogical, impulsive, and ignorant. Behavioral finance defines what's rational, identifies the causes of irrational financial behavior, and measures the financial impact of irrational behavior. Making sound financial decisions involves identifying logical fallacies. Logic can be really complicated. When you rely on faulty logic, you're relying on a fallacy. Logical fallacies can be based on flawed logic structure, distractions, emotional response, or any number of other factors that use information not related to the decision at hand. Getting emotional about financial decisions can leave you crying. In the world of corporate finance, you're typically dealing with someone else's (the company's) money, so you may think emotions run low in corporate finance. But no matter how far removed you are from the person who actually owns the money you're working with, when you're forced to make a decision, your mood and emotions will influence the decision you make to some extent. Financial stampeding can get you trampled. As soon as some trend begins to occur, financial investors start to follow that trend as quickly as possible, often without even fully knowing why. Like some other forms of behavioral anomalies, this stampeding scenario is influenced by the imperfect distribution of information. Letting relationships influence finances can be ruinous. Avoid showing favoritism based on personal relationships rather than merit or qualifications. This form of favoritism is called cronyism (or nepotism, when you're dealing with relatives). Preventing cronyism from occurring in a company is relatively simple at all levels of management except the highest. You just have to require individuals to use predetermined evaluation criteria when making important decisions and then hold them accountable for proper recording and analysis using that criteria. "Satisficing" can optimize your time and energy. People naturally apply a value to their time. This value isn't so much about money as it is about using your limited amount of time doing things you either need to do or would rather be doing. For a simple example, imagine that you're spending your day off playing video games, and you just can't take time away to go cook dinner. So you decide to order a pizza. You could probably make something healthier, cheaper, and more delicious, but you settle for something that's good enough and doesn't require any additional time or effort on your part. In corporate finance, the application and measurement of what's "good enough" is called satisficing. Satisficing, in a more practical sense, refers more to our inability to know what is truly rational. Satisficing behavior causes people to make less-than-optimal decisions based on the decision that their time was worth more than the potential benefits. As with all financial decisions, satisficing comes with a degree of uncertainty and risk, so the results can be good or bad. Prospect theory explains life in the improbable. People's financial decisions are influenced by a behavioral fluke described as the prospect theory, which basically says this: When making financial decisions that aren't certain (meaning that the outcomes aren't certain but the probability of success can be estimated), people look at the potential for gain or loss instead of relying on rational thinking using the probable outcomes. People focus on that small probability of the worst-case scenario, and then they act on it. People are subject to behavioral biases. When you're dealing with corporate finance, you rely on the collection and analysis of data to help you answer questions and make decisions. Even though all the data you need to make the best decision may be available, how you actually perceive and use that data can be an erroneous process thanks to statistical bias and cognitive bias. Statistical bias occurs when people collect data from a sample rather than an entire data set and then assume that the data they collected represent the entire data set. Cognitive bias occurs during the processing of information as people choose to use their own personal judgment rather than the data results. Analyzing and presenting information can be an erroneous process. How a person processes available data is subject to behavioral errors based on the context in which the data are presented. The process of introducing your own interpretation of a subjective measure or event is called framing. These frames will cause you to understand and interpret things in a different manner from the people around you and, as a result, alter how you each respond. Framing can influence all sorts of financial decisions. You have to be very careful to apply relevant contextual information along with any analysis you give and ensure that the manner in which you present information remains objective, neutral, and free of judgments that contribute to framing. Measuring irrationality in finance is rational behavioral finance. Understanding how irrational financial behavior works is only half the job. You also have to determine the value of irrationality. That is to say, you must figure out how much your own inherent irrationality costs you (and your company) financially.

Article / Updated 03-26-2016

The first portion of a corporate income statement, called gross profit, seeks to calculate the profitability of a company’s operations after direct costs. Its ultimate goal is to determine the company’s gross margin. For example, if you’re a self-employed window washer, your margin would be all the money you make for washing windows, minus the cost of the materials you used to wash those windows (for example, soap, water, and other supplies), but not the cost of your ladder because you use it over and over again. Net sales on the income statement Net sales is all the money that a company makes from its primary operations. If the company is a retailer, then net sales includes all the money the company generates from selling retail goods. If the company is a lawn service but it also offers tree trimming, then net sales includes the money it makes from both services. However, it doesn’t include any money made from other activities outside of its core operation(s). So no counting the extra money made from selling an old lawnmower. To get net sales, don’t subtract any costs yet. Net sales includes every last dime a company makes from sales; the costs come into play later. Some companies refer to net sales as gross income, income from sales, or some other similar term. Just remember that net sales is always the very first item on the income statement, regardless of what a company calls it. Cost of goods sold section of the income statement To make a product or provide a service, a company has to purchase supplies. Maybe a tool manufacturer needs to buy steel. Maybe a window washing company needs to buy soap and water. Maybe a tutoring company just needs to pay its tutors. No matter what its primary operation is, every company adds up all the direct costs it incurs as a result of actually making its product or service, not including indirect costs (sales costs, administrative costs, research costs, and so on), and includes them under cost of goods sold (COGS) on the income statement. The very nature of this section lies within its name: It’s the cost a company has incurred in actually making or buying the goods that it has sold. Just like the price of beer changes at the store from time to time, the costs of those things a company purchases can change. So when the things a company purchase changes, it must choose how it will measure the cost of goods sold. The two primary ways a company can account for the costs of goods sold are FIFO (first-in, first-out): With this method, a company will use the costs of those things it purchased earliest when accounting for COGS. In other words, the first inventory made or bought is the first inventory to be sold. LIFO (last-in, first-out): With this method, a company will use the cost of those things it purchased most recently when accounting for COGS. In other words, the most recent inventory made or bought is the first inventory to be sold. Because the value of inventory minus costs influences all other financial statements, a company must choose to use either FIFO accounting or LIFO accounting and stick with it for everything. If a company chooses to switch everything from one method to another, it must describe the change, including the calculated change in value resulting from the change in method, in the supplementary notes of at least the income statement and typically all the other financial statements, as well. Gross margin section of the income statement The last part of the gross profit portion of the income statement is the gross margin, which you get by subtracting the cost of goods sold from the net sales. The gross margin is all the money a company has left over from its primary operations to pay for overhead and indirect costs, like the sales staff, building rent, janitorial services, and everything else that’s not directly related to the production or purchase of inventory. When you divide gross margin by net sales, you get the percentage of net sales that isn’t spent on producing the inventory. This percentage is extremely important in evaluating a company’s ability to fund supporting operations, plan growth, and create budgets.

Article / Updated 03-26-2016

Unless you’re in a rare minority who live “off the grid” (secluded and self-sufficient), nearly every aspect of your life is strongly influenced, directly or otherwise, by corporate finances. The price and availability of the things you buy are decided using financial data. Chances are high that your job relies on decisions made using financial data. Your savings and investments all rely quite heavily on financial information. Your house, car, where you live, and even the laws in your area are all determined using financial information about corporations. From the very beginning, a corporation needs to decide how it will fund its start-up, the time when it first begins purchasing supplies to start operating. This single decision decides a significant amount about the corporation’s costs, which, in turn, decide a lot about the prices it will charge. Where it sells its goods depends greatly on whether the corporation can sell its goods at a price high enough to generate a profit after the costs of production and distribution, assuming that competitors can’t drive down prices in that area. The number of units that the corporation produces depends entirely on how productive its equipment is, and the corporation will only purchase more equipment if doing so doesn’t cost more than the corporation will be able to make in profits. These factors affect your job, too; the corporation will hire more people who add value to the company only if it’s profitable to do so. Where your job is located will depend greatly on where in the world it’s cheapest to locate operations related to your line of work. The decision to outsource your job to some other nation depends entirely on whether that role within the company can be done more cheaply elsewhere, without incurring risks that are too expensive. That’s right, even risk can be measured mathematically in financial terms. You’re probably thinking to yourself, “But that’s only my work life. Surely corporate finance has no influence on my personal life.” Well, besides controlling how much you make, what you can afford, what your job is, and where you work, corporations have this habit of also financially assessing government policy. When a proposed law (called a bill) is introduced, corporations determine what its financial impact will be on them. They also assess whether a law that exists (or doesn’t exist) has a financial impact on corporations. If the impact is greater than the cost of hiring a lobbyist in Washington, D.C., they’ll hire a lobbyist to pressure politicians into doing what they want. This effort includes campaign contributions, marketing on behalf of the politician, and more. Going even as big as international relations between nations, a single large corporation can bring an entire global industry to a stop by convincing the right people that one nation is selling goods at a price lower than cost, which causes political conflict between nations. This scenario has happened multiple times in the past, with the majority of claims being made by U.S. companies, and it can easily happen again. Every aspect of your life is influenced in some way by the information derived from corporate finance. Money is a measure of value, and you are valuable, so nearly everything that makes you who you are can be measured in terms of money. If it can be measured in terms of money, decisions will be made in terms of money. If you’re not the one making those decisions, you should probably be asking yourself who is.

Article / Updated 03-26-2016

Raising money by selling shares of equity is a little more complicated both in theory and in practice than borrowing money using loans. What you’re actually doing when you sell equity is selling bits of ownership in a company. Ownership of the company is split up into shares called stock. When you own stock in a company, you own a part of that company equal to the proportion of the number of shares of stock you own compared to the total number of stock shares. For example, if a company has 1,000 shares of stock outstanding (meaning that this is the total number of shares of stock that make up the entire company) and you own one share, then you own 0.1 percent of that company, including any profits or losses it experiences (because profits belong to the owners of the company). So when you sell equity to raise cash, what you’re really selling are the rights to a certain amount of control over how the company is managed in addition to your rights to the future profits of that company. Sell stock to the public When a company is getting ready to go public, meaning it’s opening up the purchase of equity to the public, it must first put all its records and reports in the proper format. The U.S. Securities and Exchange Commission (SEC) requires that all U.S. public companies follow specific criteria for keeping track of financial information and reporting it to the public. The company must also meet a number of accountability requirements and other more minor requirements. In other words, before becoming a corporation, a business must act like a corporation. Often this includes hiring a consultant or an investment banker to help make sure everything is in order. Then, finally, the company can go through the process of becoming established as a corporation and selling stock. The easiest way to become a corporation is to go through a full-service investment bank. Often the investment bank can take a company through all the steps, including legally reorganizing the company as a corporation, registering with the proper regulatory authorities, underwriting, and selling stock on the primary market. During the underwriting stage, an underwriter evaluates the value of the company and estimates how much the company needs to raise, how much it should raise, and how much it’s likely to raise. That same person verifies that the company meets all the requirements for being a corporation and selling stock. After that, the company can have its first IPO. An IPO, or initial public offering, occurs when a company sells stock to the public. The IPO is when selling stock actually raises money for the company. After all, the company will use the money that people pay to own stock in the company to purchase things the company needs to operate or expand. The people who buy stock from the company during the IPO make up the primary market because they take part in the initial sale of stock. After the initial stock is sold to the public, it can be resold over and over again, but the company itself doesn’t make any more money. The subsequent selling of stock is just an exchange of ownership between investors for a price negotiated between those same investors. The exchange of stock between investors is called the secondary market; it doesn’t raise any more money for the company. The different types of stock Like most aspects of corporate finance, stocks come in many varieties, but no matter which type of stock your corporation has, its value increases or decreases based on the performance of your corporation. Here are three of the main stock types, along with their distinguishing characteristics: Common stock: If you hold common stock in a corporation, you’re a partial owner, so you get to vote in any decisions regarding company policy, the board of directors, and many other issues. Keep in mind that to be brought to a vote, an issue usually needs to be instigated by one stockholder and then supported by others, at which point a voting form goes out to all stockholders of that company to fill out and return. Holding common stock also gives you rights to a share of dividend payments (profits returned to the company owners) when they’re issued, although this is optional. In case of company liquidation (selling assets after going out of business), common shareholders get whatever value is leftover after the lenders and preferred shareholders get what they’re owed. Finally, holding common stock gives you the right to receive specialized reports or analytics from the company. Preferred stock: If you hold preferred stock in a corporation, you get your dividend payouts in full before common shareholders get even a dime. That holds true for liquidation as well. As with common stock, being a preferred shareholder gives you the right to get information from a company. But the key difference between common and preferred shareholders is that preferred shareholders don’t have voting rights. So although they have a right to the ownership and success of a company, they have no voice or control over the actions the company takes. Treasury stock: When a company issues common shares of stock, it has the opportunity to repurchase those shares on the secondary market as any investor would. When a company does so, those common shares become treasury shares. The stock itself hasn’t changed at all; it’s just owned by the company that the stock represents. So, in essence, the company owns itself, which is only one step away from becoming completely self-aware and destroying us all! Companies tend to do this (buy treasury stock, not destroy us all) because they can generate income in the same way that many investors do, but buying treasury stock also allows them to more effectively manage their stock price. Another stock-related term you need to know, though it isn’t a type of stock per se, is stock split. A stock split occurs when a company takes all of its common shares of stock and splits them into pieces. Companies use stock splits to increase the liquidity of stock shares, making them easier to buy and sell and, in the long run, driving up the total value. Note that this process can easily backfire if there isn’t already a demand for a company’s stock from people who would buy it at the cheaper post-split rate.

Article / Updated 03-26-2016

When a corporation needs money, one of the primary options it has available is to borrow some. Regardless of what the money’s for, when a corporation wants a loan, it starts by putting together a proposal. For start-up companies, this proposal comes in the form of a business plan, but anytime a corporation receives a loan significant enough to influence the capital structure of the company (not lines of credit), it has to present a proposal for the use of the funds. This proposal includes financial information about the corporation, including detailed predictions for future financial well-being, called projections, that prove the company could pay back the loan on time and without risk of default. Ask the right people for money After the proposal is in place, corporations have a few options for where to go to ask for the money they need: Commercial banks: Banks are very common sources for corporate debt financing. These loans work very similar to any other loan, wherein your ability and planned use of the funds will both be evaluated in detail before the bank agrees to offer the loan. The findings of their investigation will determine, in part, the interest rate they will charge, the amount they will loan, and the duration of the loan. Government loans: These loans are frequently available, but they’re often reserved for special types of corporations (usually in a field that the government is trying to promote), corporations with a special role in the nation (such as defense contractors), or especially large companies facing the truth that they’ve been poorly managed for decades and must now resort to begging the government for money. Issuance of bonds: Bonds, which basically act as IOU’s, are possibly the most popular form of debt financing. A company goes through an underwriter to have bonds issued, and then private investors purchase those bonds. The company keeps the money raised as capital with a promise that it’ll pay back the bondholders’ money with interest. After a potential moneylender receives the corporation’s loan application, an interview process typically occurs, along with an underwriting process during which the potential lender assesses the borrower for risk, financial ability to repay the loan, credit history, and other variables. If the lender approves the loan application, the money is deposited in the corporation’s bank account, making it available for use by the corporation in a manner consistent with the original proposal. Make sure the loan pays off in the long run The responsibility for making sure a particular loan is beneficial to a company lies with that company. Every loan, except for those rare federally subsidized loans in which the government pays for the interest, incurs interest, meaning you and your company pay more money back to the lender than the lender originally gave you. Here’s a quick look at how interest works: B = P(1 + r)t This equation says that the balance (B) is equal to the principal amount (P) times the rate (r) exponentially multiplied by time (t). So if your company borrowed $100 at an interest rate of 10 percent for one year without making any payments, then the amount of money your company owes at the end of that one year would look like this: B = 100(1 + 0.1)1 The answer, then, is $110 (because $10 is 10 percent of $100 and interest is accrued annually for only one year). When accepting a loan, the goal of every company is to make absolutely sure that it can generate more returns from spending the money borrowed than the interest rate being charged. After all, by keeping the loan, the corporation agrees to pay back interest as well as the principal. Look at loan terms You have a few different options available when choosing a loan for your company. To make the best choice for your company, you need to be aware of the pros and cons of each loan type. If you’re not sure which one is best for you, ask a professional analyst — not the person trying to sell you the loan. Here are some terms you need to be aware of: Fixed versus variable rate: When you take out a fixed rate loan, the percentage interest you pay will always be the same. For example, if you take out a loan with 5 percent APR (annual percentage rate, which is your annual interest rate), then you’ll always be charged 5 percent interest per year. With a variable rate loan, the interest rate you pay will change; the amount of change depends on the type of loan. Variable rate loans come in many types, changing their rates based on another interest rate, a stock market index, your income, or some other indicator. Some increase gradually over time, while others start low and jump after a period of time (these are called teaser-rates). Secured versus unsecured: Secured loans are tied to some asset, which becomes collateral. Basically, you tell the bank that if you fail to pay back your loan, the bank can keep and/or sell that particular asset to get its money back. With unsecured loans, no assets are directly considered to be collateral to which the lender has automatic rights upon the borrower’s default of the loan. However, they can still hurt the credit history of the company, and a lender can still sue to get their money back. Open-ended versus closed-ended: Closed-ended loans are your standard loans. After your company gets one, it makes periodic payments for a predetermined time period, and then the loan is paid back and you and the lender are both done. Think of a closed-ended loan like a mortgage, except that it’s not used to buy a house. Open-ended loans are more similar to credit cards. Your company can draw upon an open-ended loan until it reaches a maximum limit, and it just continuously makes payments for as long as it has a balance. Simple versus compounding interest: Simple interest accrues based only on the principal loan. In other words, if a loan for $100 charges 1 percent interest, the lender will make $1 every period. On the other hand, compounding interest pays interest on interest. So if the borrower doesn’t make any payments on a loan of $100 with 1 percent interest in the first year, then the loan will charge 1 percent interest on $101 rather than the original $100 the second year. This type of interest is far more common with bank accounts than loans.

Article / Updated 03-26-2016

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.