EBIT is the term used in the context of accountancy while calculating profits of a company or organization during financial year, full form of EBIT is Earning Before Interest and Tax. EBIT is very important when it comes to analyzing the company’s financial results from outsider perspective because it gives a fair idea about company’s operational performance over the financial year.
Earning before interest and tax is calculated using the equation or formula, EBIT – Sales – (cost of goods sold + operating costs). Earning before interest and tax is not the final figure of profit because it excludes income tax and interest paid and therefore EBIT will always be higher than profit after tax. EBIT comes in handy when company wants to find whether the operational costs are high or low in relation to sales and whether there is any scope for reducing the operational cost and thereby improving the operation performance of the company which in turn will help in increasing the EBIT of the company.
However one should keep in mind that a higher EBIT does not guarantee that profits will also be higher because when it comes to highly leveraged companies the interest cost takes away the majority of the profits and therefore one should be very careful and should not confuse earning before interest and tax with actual profits. In simple words EBIT can be compared with trailer of a new upcoming movie if trailer is good then one cannot say with guarantee that a movie is also good in the same way a good EBIT figure does not mean that profits will also be good.