Earnings before tax (EBT)

Definition

Earnings before tax (EBT), also known as pre-tax income or profit before tax, is a financial metric used to assess a company’s profitability before accounting for taxes.

What is earnings before tax?

Earnings before tax represents the amount of money a company earns from its core operations before deducting taxes and other non-operating expenses.

Earnings before tax is calculated using the formula: 

Earnings before tax = Total revenue – Operating expenses

EBT is a key measure of a company’s operating performance because it reflects its ability to generate profits from its core business activities, independent of tax considerations. Furthermore, it allows for comparisons of profitability between companies in different tax jurisdictions or with varying tax structures. 

EBT is a key component in financial analysis and is often used in various financial ratios and metrics. For example, it serves as the starting point for calculating earnings per share (EPS), return on assets (ROA), return on equity (ROE), and other profitability ratios.

For investors, EBT provides valuable insights into a company’s financial health and its ability to generate profits from core operations. A consistent and growing EBT over time indicates a healthy and sustainable business model.

Example of earnings before tax

Company XYZ generated R1 million in revenue last year. They incurred R600,000 in operating expenses. Their earnings before tax (EBT) can now be calculated:

EBT = R1,000,000 – R600,000 = 400,000

So, Company XYZ’s earnings before tax for the year was R400,000. This figure represents the profit generated by the company from its core operations before accounting for taxes.