Definition:

EBIT is a company’s earnings before interest expense and corporation tax are considered.

Example:

A company generates $50,000 of revenue in a month. After subtracting operating expenses and depreciation, EBIT is $10,000.

It also has interest expense of $6,000, and pays 20% tax on the net profit of $4,000 to leave a profit after tax of $3,200.

Why it matters:

EBIT excludes income and tax expenses, so is useful to understand the operating performance of the business, before any decisions on how it is financed or its tax situation are considered.

It could be a great business but with too much debt (so very high interest expenses), or it could be performing better than expected due to historic losses reducing tax. Comparing EBIT to Net Profit and Profit After Tax lets us isolate these things.