The Income Statement: Earnings before Interest and Taxes

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The Income Statement: Earnings before Interest and Taxes

Earnings before interest and taxes (EBIT) is the sum of operating and non-operating income.

Example Income Statement

This is typically referred to as "other income" and "extraordinary income (or loss)." As its name indicates, it is a firm’s income excluding interest expenses and income tax expenses. EBIT is calculated as follows:

EBIT = Operating Income + Other Income (Loss) + Extraordinary Income (Loss)

Since we already know what operating income is, let us take a closer look at what other income and extraordinary income (loss) mean.

What is "other income"?

Other income is income generated outside the normal scope of a company’s typical operations. It includes ancillary activities such as renting an idle facility or foreign currency gains. This income may happen on an annual basis, but it is considered unrelated to the company’s typical operations.

What is "extraordinary income"?

Extraordinary income (loss) is income gained (lost) from an event that is deemed both unusual and infrequent in nature. Examples of such extraordinary happenings could include damages from a natural disaster or the early repayment of debt.

Many companies may not have either other income or extraordinary income in a given year. If this is the case, then earnings before income and taxes is the same as operating income. Regardless of how it is calculated, EBIT is especially relevant to bondholders and other debtors who use this figure to calculate a firm’s ability to "cover" or pay its interest payments with its income for the year.