What is Earnings Before Tax (EBT)?
Earnings before tax, or pre-tax income, is the last subtotal found in the income statement before the net income line item. The EBT metric is found after all deductions – except taxes – that 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
and, 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 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 the 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. It makes companies in different states or countries more comparable, as tax rates may differ significantly across borders. Analysts often prefer to add back taxes to net income, so that they can have an apples-to-apples comparison of earning power across a broad 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. It 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 also 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.
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