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Earnings Before Tax (EBT)

An important metric in finance and accounting

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. This financial metric is found after all deductions – except taxes – 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.

 

Earnings Before Tax (EBT) example

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

 

and, EBT = Net Income + Taxes

 

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Earnings Before Tax Template

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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 by the pre-tax income. It 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 are frequent references 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 the evaluation of its profitability.

Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) has the most add-backs and is, therefore, the furthest away from net income of the three metrics. EBITDA adds back depreciation and amortization because they are non-cash expenses which, therefore, do not impact a company’s cash flow.  To learn more about EBITDA and cash flow, read our Ultimate Cash Flow Guide.

 

Additional resources

Thank you for reading this guide to Earnings Before Tax (EBT).  CFI’s mission is to help you become a world-class financial analyst. With that goal in mind, these additional CFI resources will help you advance your career:

  • Income statement template
  • What is financial modeling?
  • Balance sheet overview
  • Financial modeling guide

 

Question: Which of the following is NOT a formula to calculate Earnings Before Tax (EBT)?

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