EBIT
The EBIT (abbreviation from English e arnings b efore i nterest and t axes , German " Earnings before interest and taxes " ) is a business key figure that describes the operating profit from the service area (original area) of a company in a certain period of time. Other terms such as operating profit, operating profit or operating income are also common. It belongs to the "pro forma figures" from the income statement according to IFRS , in which the result is adjusted for taxes and the financial result.
detection
The EBIT arose from accounting according to US-GAAP and is usually also shown when applying IFRS . The EBIT is published regularly in the consolidated financial statements of companies and does not have to be calculated. If necessary, however, it can also be determined as follows:
| Total cost method | Expense of sales method | ||
| Sales | Sales | ||
| +/- | Inventory of finished / unfinished goods | - | Manufacturing costs to achieve the sales |
| + | Other company income | = | Gross profit on sales |
| - | Cost of materials | - | Distribution costs |
| = | Gross result | - | administrative expenses |
| - | Personnel expenses | +/- | Other operational Income & expenses |
| - | Depreciation | ||
| - | Other operating expenses | ||
| = | EBIT (operating profit, operating income) | ||
Interest, investment results, other financing expenses or income as well as taxes are ignored in EBIT because these items did not arise during actual business activity. This becomes clear in the indirect determination of EBIT from the profit for the period (e.g. annual profit, quarterly profit):
| Period result | |
| + | Tax expense (e.g. income taxes) |
| - | Tax income |
| = | EBT |
| + | Interest expense and other financial expense |
| - | Interest income and other financial income |
| = | EBIT |
The EBIT largely only contains operating income and expenses and thus shows the success (increase in assets) in the operational area (service area) of a company quite well. The EBIT is not distorted by successes in the financial business (reflected in financial assets and investments), by the framework conditions on the capital market (reflected in the interest result) or the company's special tax situation. As a result, the EBIT is well suited for time comparisons on an international level. Because of these advantages, many listed companies base their reporting on EBIT. It is a measure of the operational profitability of the business. Another application is the estimation of the company value using the multiplier method .
However, the EBIT can also contain extraordinary, out-of-period or dispositive expenses and income that make it difficult to assess and compare EBIT. It should also be noted that the finance costs of target purchases or operating leases are incorrectly assigned to EBIT, although it is more appropriate to include them in the financial result. It is also debatable to what extent investments accounted for using the equity method (in the investment result) are to be allocated to the operational level. It can therefore be useful to adjust such earnings components in the operating result. Many companies make use of these adjustments when presenting their business figures. As a result, the operating profit (operating income) reported according to IFRS or US GAAP then differs from the (adjusted) EBIT shown.
Like all other operational successes, EBIT is problematic for the management of the company. Results are the result of lengthy financial and operational processes, so they lag behind the key management decisions. Hiding financial results or tax payments cannot be justified in every case. Low interest rates (due to a good rating) or low taxes (due to a sensible choice of location) can also be an expression of management decisions.
Empirical results
Using the absolute EBIT result, meaningful time comparisons can be made. This is illustrated in the illustration opposite.
According to estimates, the positive earnings trend of recent years will continue in 2020. The operating results of the largest listed companies in Germany will increase by an average of 8.6% to a record level of around € 160 billion. The breadth of the sustained upswing is remarkable, almost all industries can improve (exceptions: telecommunications, transport).
But it is also noticeable that German companies tend to lag behind in an international comparison. The top 100 companies worldwide (in the MSCI World) can increase their operating results by 13.9%. In an international comparison, the German economy is falling further behind. The backbone of the German economy is made up of traditional industrial companies that are exposed to fierce competition. In industries with high market entry barriers, higher profit increases can be achieved. These companies from the IT / Internet sector and the pharmaceutical sector are primarily located in the USA and China.
Related metrics
The key figures EBITA and EBITDA also take into account depreciation or part of it:
EBIT + Abschreibungen auf Sachanlagevermögen und immaterielles Anlagevermögen = EBITDA
EBIT margin
The EBIT margin ( english EBIT margin ) is the ratio of EBIT to sales :
The EBIT margin expresses the operating result achieved through annual sales. EBIT margins also indirectly say something about the competition in an industry, since oligopolistic or even monopoly structures tend to allow greater price freedom and therefore higher EBIT margins can be achieved. Companies that manufacture cheaply have greater advantages in achieving higher EBIT margins than companies with a high cost pool. High profitability have - companies, while there are an EBIT margin of over 15% at EBIT margins of less than 3% high profitability risks - depending on the sector. The EBIT margin is a popular indicator of return on sales worldwide, especially for public shares , for example when establishing a ranking. Similar to the return on sales , the EBIT margin says something about the profitability of a company, but like EBIT is independent of financial results, extraordinary items and taxes. The EBIT margin is often used as the basis for a company's profitability targets , for example when a company aims to achieve an EBIT margin of at least 9% within the next two financial years .
- EBIT Germany 2017
The global economic recovery drove Germany's leading companies to record sales, profit and employment in 2017. In the first nine months of the year, the total revenue of the 100 highest-turnover listed German groups rose by almost seven percent compared to the same period of the previous year to a record of 1.25 trillion euros, while profits rose by 21 percent to just under 109 billion euros. Profitability increased accordingly, as the average EBIT margin rose from 7.7 to 8.7 percent. This is the result of an evaluation by the auditing firm Ernst & Young .
Empirical results
Using the EBIT margin, meaningful time and operational comparisons can be made. This is illustrated in the illustration opposite. The empirical analysis enables various insights:
- Positive trend : The EBIT margin has been expanded both nationally and internationally in recent years. This is an indication of a decrease in the intensity of competition due to concentration processes in various industries. Oligopolistic or even monopolistic structures allow providers to have greater pricing power and regularly lead to higher margins. The positive trend is also due to the fact that sectors (Internet, telecommunications) that have comparatively high market entry barriers have grown in recent years.
- Dependence on size : Larger companies in the DAX can achieve higher margins than companies in the MDAX and SDAX. This is evidence of the existence of economies of scale and scope. It is also interesting that the successes of larger companies are more stable in crises. This is probably due to the fact that larger companies are often more broadly positioned.
- Dependence on the industry : It is noticeable that companies with a higher capital intensity tend to have higher margins. The benchmarking also reveals that credit card companies, pharmaceutical companies and internet companies in particular achieve well above-average margins. This is due to the significant barriers to market entry in these sectors.
Other metrics
In turn, EBIT can be the basis for determining other key figures, such as interest coverage , debt service coverage or return on equity .
Effects
The EBIT margin can be part of bond conditions or loan agreements within the scope of the covenants . The debtor undertakes to his creditors not to fall below a certain contractually defined lower limit of the EBIT margin. If there is a shortfall , there is a breach of contract ( English covenant breach ), which initially usually results in a healing period ( English remedy / grace period ), which is intended to enable the borrower to subsequently meet the specified key figure. However, if this still does not succeed , a higher credit margin or even an extraordinary termination right of the lender will be triggered.
See also
Web links
- manager-magazin.de - Manager Magazin from December 16, 2003, Fredmund Malik's criticism of the incorrect use of EBIT
Individual evidence
- ^ Brigham, Eugene F., 1930- author: Fundamentals of financial management . ISBN 978-1-337-90257-1 , pp. 66 ff . ( worldcat.org [accessed February 12, 2020]).
- ↑ Günter Wöhe / Ulrich Döring, Introduction to General Business Administration , 25th edition, 2013, p. 756
- ↑ Götz von Berkstein, Business Handbook of Formulas and Key Figures , 2010, p. 22
- ↑ Börsennews.de about the 100 leading companies by EBIT margin
- ↑ Ernst & Young of December 26, 2017, record year 2017 for Germany's top companies: sales, profits and employment are growing strongly , accessed on October 9, 2018