Meaning and Definition:
EBT stands for Earnings Before
Tax (EBT). It is the most
important parameter to judge the worthiness of the company from the investor’s
perspective. How does the investor care for differences in operating
efficiencies among similar companies on account of extraneous, costs of depreciation
and interest? What she or he cares about is what the company is finally earning
directly out of its operations? This question is precisely answered by EBT.
In the same breadth and for the same
reasons EBT ignores non-operating incomes the company may be earning in the
form of interest and dividends from the investments it had made by way of
deploying its surplus profits left over after meeting its operational
requirements and paying dividends.
Descending from the top of the ‘Profit
and Loss Account’, ‘Earnings Before Tax’ is the profit earned after incurring
all operational expenses and the two non-operating costs, depreciation and
interest.
We can also define it as EBDITA less
Depreciation and Interest.
Moving upwards from the bottom of the
‘Profit and Loss Account’, EBT is ‘Profit Before Tax (PBT)’ less ‘Non-Operating
Incomes’.
Formula:
=
|
Sales Revenues
|
−
|
All Expenses Including Depreciation and Interest but Excluding Tax and Appropriations
|
|
OR
|
||||
EBT
|
=
|
EBDITA
|
−
|
(Depreciation + Interest)
|
|
|
|
|
OR
|
|
EBT
|
=
|
PBT*
|
−
|
Non-Operating Income
|
Significance:
EBT is the most important metric I employ
to assess the investment worthiness of a company. I also monitor the health of
the companies I had already invested in, on a quarterly basis, fundamentally
based on the EBT. My only question remains, “Is the company still earning the
same EBT that had attracted me to make the investment in the first place?”
Example:
M/s.Old & Conservative Ltd.
|
M/s.New & Extravagent Ltd.
|
|
Sales
|
1500.00
|
1520.00
|
All Costs & Expenses before Depreciation,
Interest, Tax and Appropriations
|
800.00
|
810.00
|
EBDITA
|
700.00
|
710.00
|
EBDITA % to Sales
|
46.67%
|
46.71%
|
Depreciation
|
30.00
|
100.00
|
Earnings after Depreciation but Before
Interest, Tax and Appropriations (EBITA)
|
670.00
|
610.00
|
EBITA % to Sales
|
44.67%
|
40.13%
|
Interest
|
0.10
|
70.00
|
Earnings after Depreciation and Interest but Before, Tax and Appropriations
(EBTA or EBT)
|
669.90
|
540.00
|
EBT
|
44.66%
|
35.53%
|
Non-Operating Income
|
300.00
|
150.00
|
Profit Before Tax (PBT)
|
969.90
|
690.00
|
PBT % to Sales
|
64.66%
|
45.39%
|
Corporate Income Tax
|
320.07
|
227.70
|
Net Profit or Profit After Tax (PAT)
|
349.83
|
312.30
|
PAT %
|
23.32%
|
20.55%
|
Dividends
|
104.95
|
93.69
|
Net Profits After Taxes and Appropriations
(PAT&A)
|
244.88
|
218.61
|
PAT&A % to Sales
|
16.33%
|
14.38%
|
From the above example we can deduce that
the ‘New & Extravagant’ company has unfavourable cost structures in the form
of depreciation and interest and therefore its EBT is lower than the former and
stands at 35.53% compared to the 44.66%. While I may not judge ‘New &
Extravagant’ company harshly, still I
would always prefer to invest in the ‘Old and Conservative’ company.
Similarly, while a company having strong
and recurring, non-operating income is very attractive point, still
the company cannot be complacent and must continue to earn handsome EBT
margins, so that it will be able to make more non-operating financial
investments and earn even more non-operating incomes and free cash flows.
Conclusion:
In conclusion, EBT is very important
profit measure, after EBDITA and EBITA that that displays the final operating
profits of the company. I personally rely solely on EBT to assess the company
for possible investment.
