metrics explained

Earnings before interest and taxes vs Operating income: What's the Difference?

If you're new to business finance, you may be wondering what the difference is between earnings before interest and taxes (EBIT) and operating income. Both are important measures of profitability, but they are calculated differently and tell you different things about your business. Here's a closer look at the two measures and how they differ:

What is EBIT?

EBIT is short for earnings before interest and taxes. As the name suggests, it's a measure of your company's profitability that excludes interest and taxes. EBIT is also sometimes referred to as operating profit or operating income.

To calculate EBIT, you start with your company's net sales and then subtract the cost of goods sold (COGS), which is the cost of the raw materials and labor used to produce the goods or services that you sell. From there, you subtract operating expenses, which include things like marketing, rent, and payroll. What you're left with is your company's operating profit.

EBIT is a good measure of your company's core profitability, since it excludes items that are outside of your control, like interest and taxes. It's also a good starting point for calculating other important measures, like EBITDA (earnings before interest, taxes, depreciation, and amortization) and net income.

What is Operating Income?

Operating income is a measure of your company's profitability that includes interest and taxes. Unlike EBIT, operating income is not a measure of your company's core profitability, since it includes items that are outside of your control, like interest and taxes.

To calculate operating income, you start with your company's net sales and then subtract the cost of goods sold (COGS) and operating expenses. From there, you add or subtract interest and taxes. What you're left with is your company's operating income.

Operating income is a good measure of your company's overall profitability, since it includes items that are outside of your control, like interest and taxes. However, it's not a good measure of your company's core profitability, since it includes items that are outside of your control.

So, what's the difference?

The main difference between EBIT and operating income is that EBIT excludes interest and taxes, while operating income includes interest and taxes. EBIT is a good measure of your company's core profitability, while operating income is a good measure of your company's overall profitability.

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