How to calculate EBIT?
EBIT stands for “earnings before interest and taxes. As you can see in the visual below, your starting point would be net income, and then you would addback interest expense (net of interest income) and income tax expense (federal and state). EBIT is used to understand what the earnings of the business are prior to financing costs and income tax expense. EBIT is a valuable metric because different owners of the business might have different financing needs and income tax rates.
For example, lets take the Year 1 income statement for Lake Tahoe. As you can see, the last number in the income statement is net income. The $40 of net income would be our starting point, but then we would addback interest expense and income tax expense. When we “addback” these items, we are essentially removing the expense, which is why it is a positive number. When you addback $25 of interest expense and $25 of income tax, EBIT is $90.
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