EBIT vs. Operating Income: An Overview

Earnings before interest and taxes (EBIT) and operating income are terms that are often used interchangeably, although there is a notable difference between the two, which can cause the numbers to yield different results. The key difference between EBIT and operating income is that operating income does not include non-operating income, non-operating expenses,聽or聽other income.

Key Takeaways

  • The key difference between EBIT and operating income is that EBIT includes non-operating income, non-operating expenses, and other income.
  • EBIT is net income before interest and income taxes are deducted.
  • Operating incomes is a company鈥檚 profit less operating expenses and other business-related expenses, such as SG&A and depreciation.

Earnings Before Interest and Taxes (EBIT)

Earnings before interest and taxes (EBIT) is a company's net income before聽interest and income tax expenses have been deducted.聽EBIT is often considered synonymous with operating income, although there are exceptions.聽

Investors and creditors use EBIT to analyze the performance of a company's core operations without tax expenses and capital structure聽costs distorting the profit numbers. EBIT is calculated聽as follows:

EBIT = Net income +聽interest expense聽+ tax expense

Since net income includes the deductions of interest expense and tax expense, they need to be added back into net income to calculate聽EBIT.聽

EBIT is valuable to investors and analysts when analyzing the performance of a company's core operations.聽

Operating Income

Operating income is a company's profit after subtracting operating expenses and the other costs of running the business from total revenue.聽Operating income shows how much profit a company generates from its operations alone without interest or tax expenses. Operating income is calculated as:

Operating Income = Gross income - operating expenses

Operating expenses include selling, general and administrative expense (SG&A), depreciation, and amortization, and other operating expenses. Operating income excludes taxes and interest expenses, which is聽why it's聽often referred to as EBIT. However, there are times when operating income can differ from EBIT.

EBIT vs. Operating Income Example

Below is a portion of the聽income statement聽for聽Macy's Inc.聽(M) quarter ending May 5, 2018.

  • Operating income was $238 million, highlighted in blue.
  • Net income was $131 million, highlighted in green.
  • Interest expense was $71 million while tax expense聽was聽$52 million, highlighted in red.
  • EBIT was $254聽million聽for the period, or $131 million (net income) + $52聽million (taxes) + $71聽million (interest).
Macys Statement of Income
聽Macy's Inc.

We can see in the above example that聽operating income of $238 million was聽different from EBIT of $254 million for the quarter ($131 million + $71 million + $52 million). The reason for the difference is that operating income does not include non-operating income,聽non-operating expenses,聽or聽other income,聽but those numbers are included in net income, and thus included in EBIT. The difference between the two numbers highlights the importance of not assuming that operating income will always equal EBIT.

In the case of Macy's, we can see there was a benefit plan聽credit of $11 million and interest income of $5 million, resulting in a聽$16 million聽difference between operating income and EBIT calculations.聽聽

Key Differences

EBIT and operating income are both important metrics in analyzing the financial performance of a company.聽The example shows the importance of using聽multiple聽metrics in analyzing the聽profitability of a company.

For example, a company may聽have interest income as a key driver of revenue such as credit financing whereby聽EBIT would capture the interest聽income while operating income聽would not.