EBIT or Earnings Before Interests and Taxes is the sum total of three components- the net income of a firm, the interest, and tax expenses. While PBIT is calculated by sum totaling the net profits of the firm and deducting the overhead costs of running the enterprise from this total.
EBIT vs PBIT
The main difference between EBIT and PBIT is that while EBIT connotes the profitability of a firm prior to all income tax and interest deductions. PBIT connotes the profitability of a firm after the operating costs of running the enterprise have been deducted from the total revenue generated by the firm, without deducing interest and taxes.
Comparison Table Between EBIT and PBIT
| Parameters of Comparison | EBIT | PBIT |
| Definition | EBIT is defined as the profitability evaluation of a firm prior to the income tax and interest deductions. | PBIT is defined as the calculation of the profits earned by a firm after the operating overhead costs of running the firm have been deducted from the total revenue earned (excluding interests and taxes). |
| Full Form | The acronym EBIT connotes Earnings Before Interests and Taxes. | The acronym PBIT connotes Profit Before Interests and Taxes. |
| Method of Calculation | EBIT is calculated by subtracting the operating expenses and non-operating income from the total revenue. | PBIT is calculated by the addition of the firm’s net profit, interests, and taxes. |
| Measuring Use | EBIT is used to measure the profitability of firms. | PBIT is used to measure the profit as well as the operating income of firms. |
| Usage for Investors | EBIT is used by investors to ascertain the operating efficiency of the firm. | PBIT is used by investors to discern which enterprises have the least amount of depreciation and amortization activities. |
| Relevance as an Indicator | EBIT can be a slightly misleading indicator as the interests on the firm’s existing debts may be quite significant. | PBIT serves as a better indicator of the profitability and efficiency of an enterprise. |
What is EBIT?
EBIT is the acronym used to connote Earnings Before Interest and Taxes in the domain of finance. It is calculated as a firm’s total revenue generated prior to interest and tax deductions.
There are some other terms of reference used to connote EBIT including operating income, operating earnings, etc. The EBIT evaluation of an enterprise simply connotes its ability to mint earnings from its operations.
EBIT is important when an investor is thinking of purchasing a firm or comparing the enterprise with its market competitors. It helps them successfully infer upon the efficiency of the core operations of a firm. Thus, it is important for potential investors.
EBIT is used by investors to ascertain the most profitable endeavors. However, it is not a very sound measure of calculating the profitability of a business as interest deductions and tax deductibles are not included in its evaluations. It is a better measure of a firm’s efficiency.
What is PBIT?
PBIT is the abbreviation used to connote Profits Before Interests and Taxes. PBIT is calculated by adding the total profit, taxes, and interests. It is also commonly known as the operating profit of a firm.
PBIT is not the same as the gross profit of a firm. PBIT is the total profit left over after the expenses of running the business have been deducted.
Investors use PBIT to ascertain the most profitable enterprises. This evaluation aids them in discern firms with the least amount of depreciation and amortization costs.
PBIT represents the total earnings of a firm that it can use to pay off creditors. PBIT is the better indicator of the firm’s profitability as it takes into account the overhead costs of running the enterprise.
Main Differences Between EBIT and PBIT
- The main difference between EBIT and PBIT is that EBIT is the measure of a firm’s profitability before any interest or tax deductions, while PBIT is the measure of a firm’s profitability after the deduction of the operating expenses have been deducted from the total sales revenue.
- The full form of each abbreviation is different. EBIT stands for Earnings Before Interests and Taxes, while PBIT stands for Profit Before Interests and Taxes.
- The method of calculating each is different. While EBIT is calculated by subtracting operating expenses and non-operating income from the total operating revenue, PBIT is calculated as the sum total of net profit, interests, and taxes.
- The two concepts are used to measure slightly different entities. The earning potential of a firm is measured by EBIT. While PBIT measures profits but also operating income. Hence, the scope of measurement is a little more expansive in the case of PBIT.
- EBIT is used by investors to gauge the profitability of an enterprise in terms of operating efficiency, while PBIT is used to discern the enterprises with minimal depreciation and amortization activities.
- The relevance of each indicator is also different. EBIT can be a little misleading as the interests on the existing debts of the enterprise can be quite significant. Contrarily, PBIT is a more apt indicator as it correctly connotes the efficiency of the firm after accounting for depreciation costs.
Conclusion
EBIT and PBIT are considered synonymous terms by many novice and amateur financiers. However, there are subtle differences between the two that need to be recognized to understand the scope of each term in its totality.
EBIT is the total earnings secured by an enterprise. These total earnings are calculated before the interest and tax deductions are excluded from the value. This modality of calculating the earnings of a firm connotes the total revenue of a firm. The earnings before interest and taxes are calculated by subtracting the operating expenses and non-operating income from the total revenue.
PBIT or Profit Before Interests and Taxes is the more appropriate measure of a firm’s profitability as it is ascertained after subtracting the overheard expenses from the total revenue earned by the firm. PBIT fits the definition of real profit more closely than EBIT. It demonstrates the efficiency of a firm to pay back its creditors.
Thus, although both EBIT and PBIT are concepts used to measure the profitability of an enterprise, however, the more suitable indicator of a profitable investment is PBIT.
References
- https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00036