EBIT stands for earnings before interest and taxes. It's what a business earns from its operations once all operating expenses are taken off sales revenue, before interest and tax are paid, which is why CFI says it's sometimes called operating income.
CFI describes EBIT as one of the last subtotals in the income statement before net income. You get it by deducting all operating expenses, both production and non-production costs, from sales revenue. It strips out two things that depend on choices outside day-to-day trading: how the business is financed and which tax regime it falls under.
Two EBIT formulas
CFI gives two ways to get there, plus the EBITDA formula for contrast:
| Measure | Formula (CFI) | Notes |
|---|---|---|
| EBIT | Net income + interest + taxes | Also called operating income |
| EBIT (from EBITDA) | EBITDA - depreciation and amortization | Starts from the EBITDA figure |
| EBITDA | Net income + interest + taxes + depreciation + amortization | Not a GAAP or IFRS measure |
| EV/EBIT | Enterprise value / EBIT | CFI example: 60 / 6 = 10.0x |
CFI says starting from net income and adding back interest and taxes is the most straightforward route, because those items are always shown on the income statement. Depreciation and amortization may only appear on the cash flow statement for some businesses, so the second formula can mean more digging.
How to calculate EBIT from net income
- Start from net income, the bottom line of the income statement.
- Add back interest expense.
- Add back income taxes.
- The total is EBIT. Divide it by revenue if you want the operating margin.
- Add depreciation and amortization if you want to move up to EBITDA.
Why investors use EBIT
CFI gives two reasons. First, it's easy to calculate, because net income, interest and taxes are always broken out on the income statement. Second, it normalises earnings for the company's capital structure, by adding back interest, and for its tax regime, by adding back taxes. That makes two businesses with different debts and different tax bills much easier to compare.
The catch: EBIT vs EBITDA
EBITDA goes one step further and adds back depreciation and amortization too. CFI's separate EBITDA article makes two points worth knowing. EBITDA isn't a standardised GAAP or IFRS metric. And critics, including Warren Buffett, caution against relying on it, because it ignores depreciation, which reflects the wear and tear on assets.
CFI's explanation is the bit to remember: companies with big capital assets show a higher EBITDA by excluding large depreciation costs, yet those assets still need replacing. EBIT keeps depreciation in, so it doesn't flatter asset-heavy businesses in the same way. CFI gives EBITDA two formulas: net income + interest + taxes + depreciation + amortization, or operating profit + depreciation + amortization. I've covered EBITDA in full separately.
A worked EV/EBIT example
CFI uses EBIT in an EV/EBIT multiple, which shows how much investors will pay for each unit of operating income. Here's CFI's example, in US dollars as of October 2026:
| Line (CFI's example) | Figure |
|---|---|
| Market capitalisation | $50M |
| Plus debt | $20M |
| Less cash | $10M |
| Enterprise value (EV) | $60M |
| Net income (2017) | $4M |
| Plus taxes | $1M |
| Plus interest expense | $1M |
| EBIT | $6M |
| EV/EBIT | 10.0x |
CFI notes the multiple is used in comparable-company analysis to value a business. Line the multiples of similar companies up together and you get a sense of what the market pays for each unit of operating income in that sector.
EBIT as a stand-in for free cash flow
CFI says EBIT can be used as a proxy for free cash flow in some industries, and it works best for stable, mature companies with consistent capital expenditure. CFI's free cash flow formula starts from it: FCF = EBIT x (1 - T) + D&A + change in non-cash working capital - CapEx. For a business with lumpy spending, EBIT won't track cash closely, which is why it's a stand-in and not the real thing.
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EBIT, operating margin and net profit
Divide EBIT by sales revenue and you get the operating margin, CFI says. That's as far as this page goes on margins. For the bottom-line version, after interest and tax, see my guide to calculating net profit margin.
My verdict on EBIT
EBIT shows what the operations earn before the bank and the taxman take their share. That makes it brilliant for comparing businesses, including your own business year on year, and useless for counting cash. Use it to judge how well the trading side is doing, keep depreciation in the picture, and be a little wary when someone quotes only EBITDA for a business with lots of equipment. Those assets wear out whether the headline figure shows it or not.
Frequently asked questions
What does EBIT stand for?
Earnings before interest and taxes. CFI says it's sometimes called operating income, because it's what's left after all operating expenses are deducted from sales revenue.
How do you calculate EBIT?
CFI's simplest formula is net income + interest + taxes. You can also take EBITDA and subtract depreciation and amortization.
What's the difference between EBIT and EBITDA?
EBITDA also adds back depreciation and amortization. CFI notes EBITDA isn't a GAAP or IFRS measure, and critics including Warren Buffett warn it ignores the wear and tear on assets.
Is EBIT the same as operating income?
CFI says EBIT is sometimes referred to as operating income, because it's found by deducting all operating expenses from sales revenue.
What is EV/EBIT?
Enterprise value divided by EBIT. In CFI's example, an EV of $60M and EBIT of $6M give a multiple of 10.0x.
