The EBIT margin is a financial ratio that measures the profitability of a company based on the profits obtained before paying taxes and interest. It is calculated by dividing EBIT (or BAIT in Spanish) by net sales or income.
The term EBIT comes from the initials of its name in English, earnings before interests and taxes, that is, benefits before taxes and interest.
EBIT margin is also known as operating margin or operating margin. It is characterized by reflecting the benefit generated by the economic activity of a company alone. This, ignoring the way in which it is financed and the intervention of the State.
The EBIT margin formula is as follows:
EBIT margin = EBIT (Net profit + Taxes + Interest) / Net income
EBIT Margin Profit
The usefulness of the EBIT margin is that it allows comparing companies that do not operate in the same place. Thus, the result is not distorted by the difference between tax frameworks.
For example, suppose an investor wants to place his money in a business. After a rigorous evaluation process, it is left with two options that come from different countries. In addition, both companies have a similar level of debt and the profit margin in relation to net profit is the same.
So, the most profitable proposal, leaving aside the effect of taxes, is the one with the highest EBIT margin.
Differences between EBIT and EBITDA
Unlike EBIT, EBITDA tries to get much closer to the profits generated by the operations of the organization. To do this, it excludes not only interest and taxes, but depreciation and amortization expenses.
EBITDA is especially useful for analyzing the results of companies with high levels of capital. In sectors such as public services, depreciation expenses for fixed assets can be very high, even leading to losses. Therefore, an indicator that more accurately reflects the company’s available funds to meet its obligations is EBITDA.
Example of EBIT margin calculation
With the information in the following table we can estimate the EBIT margin.
|Net income or sales||100|
|Direct cost of goods sold||60|
|depreciation and amortization||5|
|Net profit or profit for the year||eleven|
First we calculate the EBIT by subtracting the income minus all the expenses on the list, except for financial and taxes. Nor do we consider financial income. Then we divide the result between sales.
EBIT margin = (100-60-20-5) / 100 = 0.15