EBT (Earnings Before Tax)

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Meaning and definition of Earnings before Tax

Earnings before taxes (EBT) can be defined as the money retained by a company before deducting the money due to be paid as taxes. The Earnings before Tax quantifies the operating and non-operating profits of a company before taxes are considered. It is similar to profits before taxes. Moreover, this performance indicator provides a level measure to compare companies in distinctive tax jurisdictions.

Significance of Earnings before Tax

The EBT holds great significance for investment analysts as it provides them with useful info required for evaluating a business entity’s operating performance without considering the tax implications. By removing the tax factor, Earnings before Tax is helpful in minimizing a variable which might differ for various companies, so as to focus the analysis on operating profitability as a remarkable quantification of performance. This type of analysis is important, specifically, when comparing companies across a single industry.

Formula

The general formula used for computing the earnings before tax is:

EBT = Revenue - Expenses (excluding tax)

Calculating Earnings before Tax

The main steps involved in computing the EBT include:

  • Collect the information about all the income earned. This income can be received from different sources, counting sales, commissions, or rental income. Some other sources of income include service income, interest on CDs or bank accounts, and bonuses.
  • The next step involves determining the deductible expenses. If you run a business, the most common expenses would include rent or debt service, utilities, and cost of goods sold. Besides, individuals will keep a record of their medical expenses, unreimbursed costs from their employment and charitable contributions, if any.
  • As a final step, deduct the deductible expenses from the income earned thus obtaining the resulting answer as earnings before tax.

Illustrating Earnings before Tax

The concept of earnings before tax can be illustrated in the following example:

Let us presume that a company ABC shows sales revenue worth $1,000,000 with expenses of $850,000 including $10,000 taxes. The earnings before tax would, therefore, be calculated as a deduction of the expenses from the sales revenue ($1,000,000 – ($850,000 –$10,000)), which comes to $160,000 which is the EBT. 

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