What is EBIAT?
EBIAT, or Earnings Before Interest After Taxes, is a financial metric that measures a company’s profitability and operating efficiency. The calculation of EBIAT removes the tax benefits gained out of debt financing.
EBIAT gives a true financial picture of the company, eliminating all elements that can potentially boost or reduce its financial strength. It shows what the company’s profits would be if it were paying 100% tax of its profits.
Formula for EBIAT
The formula for calculating EBIAT is as follows:
- EBIT = Revenues – Operating Expenses + Non-operating Income
Uses of EBIAT
EBIAT can be useful in the following situations:
1. Evaluating financial performance
Financial analysts use EBIAT to evaluate a company’s financial performance while taking into account the tax environment in which the business operates.
2. Getting a true financial picture
Financial decisions that a company makes are directly under their control. However, tax decisions are not under their control because tax rates and related laws are set by the government. EBIAT helps to analyze a company’s operating costs by taking into account its tax expenses to evaluate its actual operating profit.
3. Intra-company comparison
Calculating EBIAT facilitates comparison of companies operating in the same industry or in the same tax environment. Comparison is critical to making managerial decisions for the benefit of the organization. It is important because companies often differ in the proportion of their debt financing.
4. Cash flow position
EBIAT helps assess a company’s true cash flow position. It represents its liquidity or the actual availability of cash that may be used to settle its debt and other financial obligations.
5. Intra-company comparison
EBIAT is also useful for intra-company comparisons as it enables comparison of a company’s profitability over time. It provides a true picture of profitability and facilitates better comparison.
Company A generated $1,000,000 in revenues in the previous financial year. During the period, the company also reported a non-operating income of $53,000. The company’s cost of goods sold was $165,000, while its depreciation and amortization expenses were $83,000. Selling, general and administrative expenses were valued at $180,000, and miscellaneous expenses were $20,000. It also incurred a one-time cost or special expense of $48,000 for the same period.
Here, EBIT = $1,000,000 – ($165,000 + $83,000 + $180,000 + $20,000 + $48,000) + $53,000 = $557,000. Now, if the tax rate for the company is 30%, then, the EBIAT is calculated as EBIT x (1 – Tax rate) = $557,000 x (1 – 0.3) = $389,900.
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