Definition of Ebit Margin
EBIT or Earnings before interest and taxes is a measure to assess the company’s profitability. It is also named as operating profit or income before interest and taxes. It is calculated by subtracting the cost of goods sold and operating expenses except for interest and taxes from revenue.
Example of EBIT Margin:
Less: Cost of goods sold -$32,000
Gross profit $18,000
Less: Operating expenses -$7,500
Earnings before interest and taxes $10,500
To calculate EBIT margin we will divide the EBIT with Revenue
EBIT Margin = EBIT / Revenue = $10,500 / $50,000 = 21%
This percentage shows how strong the company is to pay its interest and taxes. However, if the company has higher debts, then the EBIT margin should be enough to cover the high-interest cost.