What is Earnings Before Tax (EBT)?
Earnings before tax, or pre-tax income, is the last subtotal found in the income statement before the penultimate net income line item. Earnings before tax is found after all deductions have been made against sales revenue. These deductions include COGS, SG&A, depreciation and amortization, and interest expense.
As the name implies, the last item to be deducted from EBT is taxes.
Source: CFI financial modeling courses.
Earnings Before Tax Formula
There are three formulas that can be used to calculate Earnings Before Tax (EBT):
EBT = Sales Revenue – COGS – SG&A – Depreciation and Amortization
EBT = EBIT – Interest Expense
EBT = Net Income + Taxes
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Relation to Taxes
Pre-tax income is the denominator involved when trying to find the effective tax rate a company is paying in any given period. The effective tax rate is found by dividing taxes paid with the pre-tax income. The effective tax rate is then used in conjunction with forecasted EBT to find forecasted taxes in projected income statements.
EBT vs EBIT vs EBITDA
In the world of financial analysis, there is frequent reference to EBT, EBIT, and EBITDA. It’s important to know the difference between these three metrics as well as when and why you would look at each one.
Earnings Before Tax is used for analyzing the profitability of a company without the impact of its tax regime. This makes companies in different states or countries more comparable, as tax rates may differ significantly across borders. Analysts often prefer to add back taxes so they can have an apples-to-apples comparison of earning power across a wide range of companies.
Earnings before interest and taxes (EBIT) is also popular with analysts because it adds one additional level of comparability, which is to add back interest expense as well. While EBT normalizes for taxes, EBIT normalizes for both taxes and interest expense. This means the capital structure of the company does not impact its profitability.
Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) has the most add-backs and is, therefore, the further away from net income of the three metrics. EBITDA adds back depreciation and amortization because it’s a non-cash expense which means it doesn’t impact a company’s cash flow. To learn more about EBITDA and cash flow, read our Ultimate Cash Flow Guide.
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