EBIT vs. PBIT

In accounting and finance, EBIT and PBIT are used as a measure of a firm’s profitability that excludes interest and income tax expenses. EBIT is an acronym for Earnings Before Interest and Taxes, while PBIT is short for Profit Before Interest and Taxes. Noticeably, there is a number of similarities between the nature of EBIT and PBIT. On a superficial level, the only difference would be the first letter of their respective acronyms; however, one must note that what these first letters stand for –earnings and profit – are not mere synonyms; there is a noteworthy difference between them.

In business terms, earnings (also called revenues) pertain to the money a company collects. Profit, on the other hand, is the money left after all expenses are paid. For most enterprises, expenses must be paid out of revenue; the remainder after all incurred manufacturing or delivery costs is the profit. Given these definitions, there is some variation in computing EBIT and PBIT. In accounting and finance, EBIT is equal to Operating Revenue ‘“ Operating Expenses (OPEX) + Non-operating Income, while PBIT is equal to Net profit + Interest + Taxes.

EBIT, or operating income, is a measure of a firm’s profitability that excludes interest and income tax expenses. The larger the EBIT value, the more profitable the company is likely to be. Operating income is operating revenues minus operating expenses, but it is also used as a replacement for EBIT and operating profit, which is specifically applicable to firms with no non-operating income. EBIT is derived by subtracting expenses, commonly comprised of the cost of goods sold, as well as selling and administrative expenses, from revenues. Simply put, EBIT evaluates a company’s earning potential and serves as a crucial consideration in changing the capital structure of business. It is also commonly used by investors to compare companies, identifying the most profitable ones in terms of the efficiency of its operation. However, it’s not recommended to use EBIT to appraise an individual company’s profitability; even supposing a profoundly leveraged business may appear profitable using EBIT, it may in fact be at the losing end once interest on its significant debt load is taken into consideration. Taxation can also significantly pull a company’s profitability. Basing the evaluation solely on EBIT may conceal the fact that a seemingly promising company is, in actuality, a poor investment choice.

PBIT, also interchanged with operating income, also measures an enterprise’s profitability by subtracting operating expenses from revenue excluding tax and interest. Furthermore, PBIT is also known as operating income, operating profit, or even operating earnings. In most cases, investors take note of PBIT when viewing income statement. Some confuse it with gross profit; to clarify this misconception, it is important to note that in PBIT, revenue is deducted with operating expenses (OPEX) excluding interest and taxes, while in gross profit, revenue is deducted with only one component of the OPEX – the cost of goods sold (COGS ). PBIT is mostly used by creditors to screen companies with minimal depreciation and amortization activities, since it represents the amount of money the companies can earn to pay off creditors.

Summary

1) Earnings Before Interest and Taxes (EBIT) and Profit Before Interest and Taxes (PBIT) both measure a firm’s profitability excluding interest and income tax expenses.
2) EBIT = Operating Revenue ‘“ Operating Expenses (OPEX) + Non-operating Income. PBIT is equal to Net profit + Interest + Taxes.
3) EBIT is mostly used to evaluate a company’s profitability in comparison to others, while PBIT is frequently used by creditors to measure a company’s earning and paying capacity.

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