EBIT vs Operating Income
I keep hearing different things and Google searches provide different answers as well. I always thought they were the same but my accounting textbook lists them as different items. Can you guys help me once and for all differentiate between the two.
Thanks.
what is operating income?
Operating Income is the income that is generated through a businesses’ operations and is calculated as Gross Income (Revenue - COGS) minus operating expenses - depreciation and amortization. This excludes non-operating income and expenses, taxes, and capital structure expenses (interest expense).
What is Non-Operating Income?
Non-operating income is income that is generated separate from the core operations of the business. These can include dividends from investments, profits and losses from investments, FX gains and losses, and non-operating revenue and expenses.
What is EBIT?
EBIT is difficult in that it can be the same as operating income or it can be different. Earnings Before Interest and Tax (EBIT) looks to find the income from the operations of the business without taking into account the tax and capital structure of the business. For many businesses, EBIT includes non-operating income and expenses.
The easiest way to calculate EBIT is to take Net Income and add back interest and tax expense.
Difference Between EBIT and Operating Income
Due to the fact that EBIT is a non-GAAP metric (whereas operating income is GAAP) it can be reported different ways by different companies. Some companies choose to report EBIT with non-recurring expenses and other income included in the metric. Additionally, interest income may be included in EBIT (however, interest expense is always not included.)
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EBIT takes into account non-operating income. Operating income take into account only COGS and SG&A.
EBIT is earnings before interest and taxes.
Operating Income usually takes it a step further by adding back other items that are not considered to be 'core business expenses'. These items could be things like 1x legal fees, restructuring costs, stock based compensation, and other random one-time expenses that are not associated with the core operations of the business.
So if General Electric sells one of its office buildings for a $5MM profit, that profit will be included in EBIT, but usually for Operating Income they will not include it because it is not considered "core" to the company's business.
The two figures are indeed pretty similar and are often used interchangeably
Not sure if I'm misinterpreting but do you mean subtracting instead of adding back non-core business expenses?
No, EBIT computation would account for other income, non core business expenses. So, Operating Income would be computed as follows:
Operating Income = EBIT - Other Income + Non core business expenses
Keep in mind that any one-time items should be captured in the EBIT normalizations provided by a due diligence process. Both income figures should provide similar values.
my office uses them interchangeably because we never look at ebit without adjusting for things like sbc, one time expenses, amortization, etc - which is the same thing as operating income
I thought it went along the lines of:
Revenue - COGS = Gross Profit Gross Profit - Operating expenses = Operating Income Operating Income - Other income (like interest income) = EBIT EBIT + Depreciation/Amortization = EBITDA
something like that?
You mean: Operating Income + Other Income = EBIT
you're right, I stand corrected
Operating income= Total operating rrevenue-Total operating expense EBIT =Operating income + Interest and Dividend income +/- non-operating gains/losses +/-Gains/ losses on discounted operations +/- gains or losses on non-recurring events Therefore, EBIT = Operating income +/- non-operating income/losses
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