Slide 1 : info.stanleysolutions@gmail.com namrataaro@gmail.com
namrata_arora@rediffmail.com Simplifying Finance Concepts EBIT
&
ITS APPLICATIONS
GUESS WHAT IT MEANS? : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com GUESS WHAT IT MEANS? EBIT
PBT
PAT
NPBT
NPBIT Very scary concepts for many, all you need to remember is:
B is ‘before’, A is ‘after’
I is ‘interest’
T is ‘tax’
E is ‘earnings’
NP is ‘net profit’
P is ‘profit’
EBIT is SIMPLE to remember! : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com EBIT is SIMPLE to remember! Next time you come across EBIT, you’ll be sure the financial information is talking about Earnings before Interest and Tax
Other Names: Operating Earnings, Operating Profits, Operating Income
FORMULAS : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com FORMULAS EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income
Operating Income = Operating Revenue – Operating Expenses (when the firm has no Non-operating Income, EBIT is equal to Operating Income)
Operating Revenue = Sales Revenue
Operating Expenses = Cost of Goods Sold; Selling, General and Administrative Expenses; Depreciation and Amortization; other expenses
Non-Operating Income = Dividend Income, Profits from Investments, Gains incurred due to Foreign Exchange.
APPLICATION OF EBIT : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com APPLICATION OF EBIT EBIT has a number of applications
Let’s have a look at a few
Application of EBIT: Ratio Analysis : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com Application of EBIT: Ratio Analysis Interest Coverage Ratio = EBIT/Interest
Net Profit Margin = EBIT (1-T) X 100
SALES
Return on Investment = EBIT (1-T) X 100
Total or Net Assets
called Return on Net Assets or Return on Capital Employed
Calculation of PAT = (EBIT-INT)(1-T)
Application of EBIT: Financial & Operating Leverage : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com Application of EBIT: Financial & Operating Leverage EPS and ROE calculations
Analyzing Alternative Financial Plans (Constant and Varying EBIT, EPS-EBIT Analysis)
Degree of Operating Leverage
Degree of Financial Leverage
Assessing Shareholders Risk
Application of EBIT: Capital Structures : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com Application of EBIT: Capital Structures NI or Net Income or Shareholder’s earnings (EBIT - INT) when corporate taxes do not exist
Analysis of the Moddigliani-Miller Hypothesis under Corporate Taxes
EBIT-EPS approach and many more…
DON’T PANIC : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com DON’T PANIC You are planning to close this slide show. Right?
Wait. Let’s simplify the Application
Now watch!
EBIT SIMPLIFIED forRatio Analysis : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com EBIT SIMPLIFIED forRatio Analysis EBIT is put in formulas straight away , no need to add or subtract interest, depreciation or any other figures.
EBIT forFinancial and Operating LeverageSIMPLIFIED : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com EBIT forFinancial and Operating LeverageSIMPLIFIED For EPS, ROE, DOL, DFL put EBIT in the formula.
For analysis and assessment of Alternative Financial Plans and Risks, deduct interest, taxes to come to Profit after Taxes and then add back Interest to find Total earnings of investors.
EBIT SIMPLIFIED forCapital Structures : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com EBIT SIMPLIFIED forCapital Structures EBIT is straight away put in formulas of Ratios and Costs.
For the M-M Hypothesis under Corporate Taxes, interest and taxes are deducted from EBIT and then, the PAT is used in formulas.
WHAT NEXT? : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com WHAT NEXT? Open up practical questions in your books, assignments or tests sheets
Apply the simplified form
Attempt two questions of each type and understand the concept
CONTACT : namrataaro@gmail.com
namrata_arora@rediffmail.com info.stanleysolutions@gmail.com CONTACT To get your Finance Questions Solved, Assignments Made, Projects Planned And Concepts Simplified, contact:
Stanley Solutions
Namrata Arora
E-mail: info.stanleysolutions@gmail.com