EBIT vs Net IncomeComparison of Differences along with Examples
EBIT or Earnings Before Interest and Taxes, as the name suggests, is used to measure the profit of the company before taking into consideration the amount of interest and taxes paid for by the company.
Net Income is used to measure the profitability of the company after deducting all the necessary costs of doing business.
EBIT vs Net Income Differences
EBIT is a metric used by companies to measure the profitability of a company based only on its core operations, which is why EBIT is synonymous with operating Income.
Net Income is calculated to know the financial performance of a company, or the total profit of the company at the end of each accounting period.
It does not just take into consideration the operating expenses but all other expenses related to the business.
EBIT vs. Net Income Key Differences
Below are the key differences between EBIT and Net Income which can help people identity the two:
Interests and Taxes
EBIT clearly does not take into consideration the capital structure and taxes that a company needs to pay.
In order for investors to make a comparison between companies, basing the profitability of companies on the basis of net income will not be able to help them decide as companies may have different capital structure and may have different tax jurisdictions.
But to make comparisons based on EBIT, they will have an idea of a company’s profitability based only on the company’s core operations.
Net Income on the other hand, measures how profitable a company is after considering all the expenses, not just operating expenses.
Use
Net Income is important to be able to know the Earnings Per Share (EPS) of a company while EBIT is used to be able to know whether the company’s operations are profitable.
Calculation
When computing for EBIT, simply subtract the total operating expenses from the Net Revenue, and to compute the Net Income, just subtract all the expenses of the business from the Net Revenue.
As a Metric for Decision Making
It is important to know where you want to apply the information you get from both the EBIT and Net Income because there are drawbacks when you only use a specific metric.
For example, simply taking EBIT will not be able to give stakeholders an information of the capital structure of the company through the interest they pay, or the amount of taxes they have paid and other non-operating expenses incurred by the company.
Net Income considers all the expenses incurred by the company and will give the most information of whether or not a company is operating at a profit or a loss.
End Users
EBIT is used by governments and investors to know the operational profitability of a company.
Net Income is used by equity investors who are interested in knowing the Earnings Per Share of the company in order to make the best investment decisions.
EBIT and Net Income – Final Thoughts
EBIT and Net Income are both important metrics to know a company’s profitability and the overall information on the company’s financial performance.
They are both important for stakeholders to make informed and sound financial decisions whether to invest or to make internal control decisions for the betterment of a company’s operations.
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Cornell Law School "Definition of net income and proceeds and standard for allocating net income or proceeds to various periods. " Page 1 . December 6, 2021
Harvard Business School "How to Read & Understand an Income Statement" Page 1 . December 6, 2021
Duke "Terminology" Page 1 . December 6, 2021