EBIT vs RevenueDefined, Diffences, and Examples

Written By:
Adiste Mae

Companies get evaluated for a variety of reasons.

In the evaluation, there are different metrics used depending on what it is that they want to learn in terms of the financial health of the company.

For example, investors would want to know the profitability of a company.

The EBIT, is one metric used to evaluate how profitable a company is. EBIT or Earnings Before Interest and Taxes, is also called Operating Profit.

Only operating expenses are subtracted from the Net Revenue to compute for EBIT.

What is EBIT?

One way to evaluate the profit earning capacity of a business based on its core operations is through the computation of EBIT.

As its name implies, EBIT is the operating income or operating profit of the company before subtracting the interest payments and taxes paid.

Computing for EBIT allows for those who are interested in the evaluation of the company’s profitability to determine whether their core operation is efficient and is able to generate profits for the company.

Another way of computing EBIT is by subtracting the interest and taxes from the Net Income.

If we show it as a formula, computing for EBIT will look like this:

EBIT = Net Revenue – Cost Of Goods Sold (COGS) – Operating Expenses

– or –

EBIT = Net Income + Interest + Taxes

What is Revenue?

Revenue is synonymous with Sales or Turnover of a business.

It is a metric used to measure how well the operations of a company performs during a certain period of time.

Revenue is defined as the amount a company generates from the normal operations of a business and is computed by multiplying the average sales price of a product to the number of units sold.

An important consideration for businesses and revenue recognition is that it must be earned to be recognized – a service must be rendered and goods must be delivered.

For companies that receive payments in advance for goods and services that are not yet rendered or delivered, it will not be recognized as a revenue but instead, it shall be recorded as deferred revenue (a liability) until earned.

In the accrual method of accounting, revenue includes goods and services that have been completely delivered but still unpaid.

Therefore, revenue includes credit sales.

Difference Between EBIT and Revenue

EBIT and Revenue are both important metrics for evaluating the financial health of a company.

However, there are key differences between the two:

Definition

Revenue is used to measure the financial performance of the company and analyze its growth based on their current operations.

It also represents the total sales that a company has generated for a specific period for their goods and services delivered, regardless of whether the payment has been received or not (accounts receivable).

EBIT is a metric to measure just the operating income or profit of the company before any interest or taxes are subtracted.

It is a metric that is helpful for investors who wish to only see the efficiency and profit-making capacity of the core operations of the business.

Significance

Revenue gives companies an indication of how well the company is performing based on the growth of their sales.

The revenue reported is shown in the Income Statement and is the basis for subtracting expenses of the company.

EBIT as a metric for computing the operating income of a company gives an indication of how each dollar earned contributes to the operating income.

The higher the EBIT is, the better the indication of a company’s profitability.

Formula

To compute for EBIT, there are two ways to do it:

EBIT = Net Revenue – Cost Of Goods Sold (COGS) – Operating Expenses; or

EBIT = Net Income + Interest + Taxes

To compute for the Revenue:

Revenue = # of Units Sold x Average Sales Price per Unit

Summary of EBIT vs. Revenue

Revenue and EBIT are both important financial measures of a company.

Where Revenue measures the financial growth and performance of a company for a given time period based on the goods and services they have delivered, the EBIT is a metric used to compute the operating income of a company.