EBIT means earnings before interest and taxes. It is your operating profit: revenue minus cost of goods sold, minus operating expenses, minus depreciation and amortization. EBIT shows what the business itself earns, before the bank and the tax office take their share. It equals EBITDA minus depreciation and amortization.
EBIT answers a narrow question: does the business make money from what it actually does? It removes interest, so a company with a large loan and a company without debt can be compared on the same basis. It removes tax, which depends on the country and the legal form you chose.
Worked example. Revenue is 900,000 euros and COGS is 360,000 euros, so gross profit is 540,000 euros. Operating expenses are 420,000 euros and depreciation is 45,000 euros. EBIT is 540,000 minus 420,000 minus 45,000, which is 75,000 euros. That is an EBIT margin of 8.3 percent. If the company then pays 15,000 euros of interest and 25 percent tax, net income is 45,000 euros.
Where founders go wrong: they treat EBIT and EBITDA as interchangeable. The gap between the two is depreciation and amortization. In a machine-heavy business that gap can be more than a third of the operating profit, as above, where 45,000 euros of depreciation turns 120,000 euros of EBITDA into 75,000 euros of EBIT. Quote EBITDA to your bank and EBIT to your supplier and you have described two different pictures of the same year.
A second error is hiding one-off costs inside EBIT. A legal dispute or a relocation can push EBIT down for a single year. Show the figure as it is, then add one line that explains the one-off effect. Readers accept adjustments that are labeled. They distrust numbers that quietly leave things out.
