EBIT vs. Operating Income: What’s the Difference?

EBIT vs. Operating Income: An Overview

Earnings before interest and taxes (EBIT) and operating income are terms that are often used interchangeably, although there is a notable difference between the two, which can cause the numbers to yield different results. The key difference between EBIT and operating income is that operating income does not include non-operating income, non-operating expenses, or other income.

Earnings Before Interest and Taxes (EBIT)

Earnings before interest and taxes (EBIT) is a company’s net income before interest and income tax expenses have been deducted. EBIT is often considered synonymous with operating income, although there are exceptions. 

Investors and creditors use EBIT to analyze the performance of a company’s core operations without tax expenses and capital structure costs distorting the profit numbers. EBIT is calculated as follows:

EBIT = Net income + interest expense + tax expense

Since net income includes the deductions of interest expense and tax expense, they need to be added back into net income to calculate EBIT. 

Operating Income

Operating income is a company’s gross income after subtracting operating expenses and the other costs of running the business from total revenue. Operating income shows how much profit a company generates from its operations alone without interest or tax expenses. Operating income is calculated as:

Operating Income = Gross income – operating expenses

Operating expenses include selling, general and administrative expense (SG&A), depreciation, and amortization, and other operating expenses. Operating income excludes taxes and interest expenses, which is why it’s often referred to as EBIT. However, there are times when operating income can differ from EBIT.

Key Differences

EBIT and operating income are both important metrics in analyzing the financial performance of a company. However, EBIT and operating income can be different. For example, a company may have interest income such as credit financing, which EBIT would capture, while operating income would not capture interest income.

Also, EBIT strips out the cost of debt (or interest expense), which is deducted from revenue to arrive at net income. By adding back interest expense to net income to arrive at EBIT, we can see net income without the cost of debt. This can be helpful when comparing the profitability of two similar companies, one of which has debt while the other doesn’t.

Operating income is also important because it shows the revenue and cost of running a company without non-operating income or expenses, such as taxes, interest expenses, and interest income. Operating income helps investors to determine if a management team is running the company properly and allows for comparison to other similar companies within the same industry.

EBIT vs. Operating Income Example

Below is a portion of the income statement for Tesla Inc. (TSLA) for the years ending 2021 and 2020 as reported via the company’s annual 10-K filing on Dec. 31, 2021.

• Operating income was $6.523 billion in 2021, highlighted in blue.
• Net income was $5.644 billion, highlighted in green.
• Interest expense was $371 million while tax expense was $699 million, highlighted in yellow.
• EBIT was $6.714 billion for 2021, or $5.644 billion (net income) + $699 million (taxes) + $371 million (interest).

We can see in the above example that the 2021 operating income of $6.523 billion was less than the EBIT of $6.714 billion. The reason for the difference is that operating income does not include non-operating income, such as interest income and other income, but they’re included in net income, which is used as the starting point in the EBIT formula. The difference between the two numbers highlights the importance of not assuming that operating income will always equal EBIT.

In 2020, EBIT was $1.9 billion, or $862 million (net income) + $292 million (taxes) + $748 million (interest). The 2020 EBIT figure was much lower than 2021 primarily due to the coronavirus pandemic. We can also see that 2020 operating income was $1.994 billion—again, much lower than the $6.523 billion in 2021.

Operating Income vs. EBIT Questions & Answers