Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley's operating income, or EBIT?
Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than
It is a financial metric used to measure a company's operating profitability by subtracting its operating expenses from its total revenues.
EBIT is calculated by subtracting the company's cost of goods sold (COGS) and operating expenses, such as salaries, rent, and utilities, from its total revenues. EBIT does not include any interest expense or income tax expense. Therefore, it provides a measure of a company's operating profitability before considering the impact of interest payments and taxes.
EBIT is an important metric for investors and analysts because it provides a clear picture of a company's profitability from its core operations, rather than from its financing or tax strategies. EBIT is used to compare the performance of companies within the same industry and to identify trends over time. It is also used to calculate other financial ratios, such as EBIT margin, which is EBIT divided by total revenue, to measure a company's operating efficiency.
However, it is important to note that EBIT does not provide a complete picture of a company's profitability, as it does not consider the impact of interest payments or taxes. Therefore, other metrics such as net income or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) should also be considered when evaluating a company's financial health.
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