EBIT is an acronym that stands for earnings before interest and taxes, and EPS is an acronym that stands for earnings per share. These two acronyms are measurements that investors use to determine the profitability of companies. If you decide to analyze a company's performance for investment purposes, then learn what these two items are and how to use them prior to investing your money.
EBIT is usually listed on a company’s income statement. It is near the bottom of the statement and indicates the company’s profit before it pays interest and taxes. It represents the company’s actual operating profit and its ability to produce income. To calculate a company’s EBIT, subtract the company’s expenses from its revenues. This indicates the actual amount of money a company earned before paying required expenses, which are taxes and interest.
EPS is also often found on a company’s income statement. To calculate it, divide the company’s net profit, minus dividends, by the average number of shares of stock outstanding. It is very difficult to find the actual outstanding number of shares of stock outstanding; therefore, companies use an average number. A trailing EPS is the total of a company’s EPS for four consecutive quarters, or one year. A company calculates a rolling EPS by using the previous two quarters' EPS amounts and the estimated future EPS numbers for the next two quarters.
Investors use both EBIT and EPS when comparing the profitability and performance of companies. They look for larger numbers in both cases, which symbolize higher profitability. Investors and stakeholders take many other calculations into consideration, however, when determining various companies’ financial positions. Investors never rely on one single calculation or ratio when determining where to invest money.
Some investors consider EPS to be the single most important measurement of a company’s profitability. Investors must always be careful when comparing EBIT and EPS numbers, however, because many factors can contribute to these calculations. A good understanding of other financial ratios is helpful for all stakeholders and investors.
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