To get down to Gross Profit you start with Revenue, subtract COGS to get down to your Gross Profit. From Gross Profit you subtract Operating Expenses to get down to Operating Income or EBIT.
To get down to Gross Profit you start with Revenue, subtract COGS to get down to your Gross Profit. From Gross Profit you subtract Operating Expenses to get down to Operating Income or EBIT.
EBIT = Operating Income
Not trying to be rude, but my question is about non-operating expenses - I understand that Gross Profit - Operating Expenses = Operating Income. Any insights on that?
Since EBIT = Operating Income, I wouldn't think non-operating expenses would be included in there hence the reason why it's called Operating Income. Don't over think it.
EBIT = Operating Income
EBIT is generally gross profit - operating expenses, before non-operational items such as other income, interest income, etc.
I've also seen EBIT calculated as gross profit - operating expenses - other expenses (excluding interest and taxes).
The first definition is mostly widely used though, and that's what I'd stick with for interviews and general purposes
"Expenses are the costs incurred by a business over a specified period of time to generate the revenue earned during that same period of time. For example, in order for a manufacturing company to sell a product such as light bulbs, it must buy the materials it needs to make the product, such as glass. These materials are called Costs of Goods Sold. In addition, that same company must pay people to both make and sell the product. The company must also pay salaries to the individuals who operate the business.
These are all types of expenses that a company can incur during the normal operations of the business, usually referred to as selling, general and administrative expenses. The net result of these revenue and expenses is referred to as operating income. Operating income is usually referred to as EBIT (Earnings Before Interest and Taxes). From here, companies pay interest on debt and taxes. Any money left after doing so is considered the third source of financing."
literal EBIT (what you would learn in an accounting course) is net income plus taxes plus interest expense, hence it includes (is below) non operating expenses. adjusted EBIT (which is what bankers care about for valuation purposes) is equivalent to operating income and is net income plus taxes plus interest expense plus non operating expenses (usually one-time, non-recurring items).
First, realize that each company has some leeway in defining what it's EBIT is. This discretion comes from what it may choose to classify as one time expenses vs recurring expenses. This basically is the reason why you have 2 different definitions
The definition of EBIT from wikipedia: EBIT = Operating Income - Other (non-operating) Expenses .... assumes that there will be some non-recurring/non-operating expenses, e.g. acquisitions, building factories, etc.
The second definition assumes no non-recurring/non-operating expenses.
Now coming to why the banker said you were wrong... Could be any of the following:
You were discussing a case-type scenario with no non-operating expenses
You classified something (in your mind) as a non-operating expense that he thought of as an operating expense
The type of industry he was focusing on rarely deals with non-operating expenses
He was using a certain model he used at work as a frame of reference for his question and that model did not point out the difference I did
He was wrong... happens to everyone
The best way to get around it is to give the other alternative (EBIT = operating income) and explain why both your answers make sense. If you can do this properly you may even get bonus points for enhanced understanding of financial concepts
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Eveniet omnis facilis unde vel libero et accusantium. Ab excepturi voluptas sed beatae reprehenderit qui quis. Enim tempore a aperiam qui impedit ullam alias. Excepturi molestiae vitae qui est.
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EBIT = Gross Profit - Operating Expenses.
To get down to Gross Profit you start with Revenue, subtract COGS to get down to your Gross Profit. From Gross Profit you subtract Operating Expenses to get down to Operating Income or EBIT.
EBIT = Operating Income
Not trying to be rude, but my question is about non-operating expenses - I understand that Gross Profit - Operating Expenses = Operating Income. Any insights on that?
In banking, we are generally concerned with operational value. Therefore, figures would exclude one-time or non-recurring expenses or income.
Since EBIT = Operating Income, I wouldn't think non-operating expenses would be included in there hence the reason why it's called Operating Income. Don't over think it.
EBIT = Operating Income EBIT is generally gross profit - operating expenses, before non-operational items such as other income, interest income, etc. I've also seen EBIT calculated as gross profit - operating expenses - other expenses (excluding interest and taxes). The first definition is mostly widely used though, and that's what I'd stick with for interviews and general purposes
EBIT = Operating Income
other income/expense would be listed below the line (operating income)
EBIT = OPERATING INCOME
end of thread
99% of people them interchangeably. I've been in IB/PE for 4+ years and don't know the difference (if any), and it has never been an issue.
Well, this is from Vault Guide:
"Expenses are the costs incurred by a business over a specified period of time to generate the revenue earned during that same period of time. For example, in order for a manufacturing company to sell a product such as light bulbs, it must buy the materials it needs to make the product, such as glass. These materials are called Costs of Goods Sold. In addition, that same company must pay people to both make and sell the product. The company must also pay salaries to the individuals who operate the business. These are all types of expenses that a company can incur during the normal operations of the business, usually referred to as selling, general and administrative expenses. The net result of these revenue and expenses is referred to as operating income. Operating income is usually referred to as EBIT (Earnings Before Interest and Taxes). From here, companies pay interest on debt and taxes. Any money left after doing so is considered the third source of financing."
I hope this info helps.
literal EBIT (what you would learn in an accounting course) is net income plus taxes plus interest expense, hence it includes (is below) non operating expenses. adjusted EBIT (which is what bankers care about for valuation purposes) is equivalent to operating income and is net income plus taxes plus interest expense plus non operating expenses (usually one-time, non-recurring items).
First, realize that each company has some leeway in defining what it's EBIT is. This discretion comes from what it may choose to classify as one time expenses vs recurring expenses. This basically is the reason why you have 2 different definitions
The definition of EBIT from wikipedia: EBIT = Operating Income - Other (non-operating) Expenses .... assumes that there will be some non-recurring/non-operating expenses, e.g. acquisitions, building factories, etc.
The second definition assumes no non-recurring/non-operating expenses.
Now coming to why the banker said you were wrong... Could be any of the following:
You were discussing a case-type scenario with no non-operating expenses
You classified something (in your mind) as a non-operating expense that he thought of as an operating expense
The type of industry he was focusing on rarely deals with non-operating expenses
He was using a certain model he used at work as a frame of reference for his question and that model did not point out the difference I did
He was wrong... happens to everyone
The best way to get around it is to give the other alternative (EBIT = operating income) and explain why both your answers make sense. If you can do this properly you may even get bonus points for enhanced understanding of financial concepts
Dolor laborum asperiores vitae corrupti reprehenderit. Velit tenetur officia dolor laudantium distinctio voluptas nam. Aut molestiae aspernatur eos vero architecto consequuntur quas. Ab expedita aliquam commodi culpa ut consequatur. Quia reprehenderit maxime ab sint.
Eveniet omnis facilis unde vel libero et accusantium. Ab excepturi voluptas sed beatae reprehenderit qui quis. Enim tempore a aperiam qui impedit ullam alias. Excepturi molestiae vitae qui est.
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