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1. NAME:- SAGNIK BHATTACHARJEE
STREAM:- CIVIL ENGINEERING
YEAR:- B-TECH 3RD YEAR 6TH SEM
ROLL NO.:- 27901321011
SUBJECT:- ENGINEERING ECONOMICS ESTIMATION & COSTING
SUBJECT CODE:- CE(PC) 602
KALYANI SHILPANCHAL, PO+P.S. – KALYANI,
DIST – NADIA, WEST BENGAL – 741235, INDIA

2. What is Earnings Before Interest and Taxes (EBIT)?
EBIT stands for Earnings Before Interest and Taxes and is one of the
last subtotals in the income statement before net income. EBIT is also
sometimes referred to as operating income and is called this
because it’s found by deducting all operating expenses (production
and non-production costs) from sales revenue.
Dividing EBIT by sales revenue shows you the operating margin,
expressed as a percentage (e.g., 15% operating margin). The margin
can be compared to the firm’s past operating margins, the firm’s
current net profit margin and gross margin, or to the margins of
other, similar firms operating in the same industry.

3. EBIT Formula
Earnings Before Interest and Taxes can be calculated in two ways. The first is by starting with
EBITDA and then deducting depreciation and amortization. Alternatively, if a company does not
use the EBITDA metric, operating income can be found by subtracting SG&A (excluding interest
but including depreciation) from gross profit.
Here are the two EBIT formulas:
EBIT = Net Income + Interest + Taxes
EBIT = EBITDA – Depreciation and Amortization Expense
Starting with net income and adding back interest and taxes is the most straightforward, as these
items will always be displayed on the income statement. Depreciation and amortization may only
be shown on the cash flow statement for some businesses.

4. Why Use EBIT?
Investors use Earnings Before Interest and Taxes for two reasons: (1) it’s easy to
calculate, and (2) it makes companies easily comparable.
1 – It’s very easy to calculate using the income statement, as net income, interest, and
taxes are always broken out.
2 – It normalizes earnings for the company’s capital structure (by adding back interest
expense) and the tax regime that it falls under. The logic here is that an owner of the
business could change its capital structure (hence normalizing for that) and move its
head office to a location under a different tax regime. Whether or not these are realistic
assumptions is a separate issue, but, in theory, they are both possible.

5. Example
A company reported a market capitalization of $50M, a debt of $20M, and cash of
$10M. The company also posted a 2017 net income of $4M, taxes of $1M, and
interest expense of $1M. What is its 2017 EV/EBIT multiple?
Solution:
EV = $50M + $20M – $10M = $60M
EBIT = $4M + $1M + $1M = $6M
2017 EV/EBIT = 10.0x

6. Thank You