Is the EBIT Margin the Same as a Profit Margin?
Earnings before interest and taxes, or EBIT, margin and profit margin are financial accounting tools that help you measure operational efficiency and profitability but each is different from the other. Ignorance of their features and differences can cause confusion that might lead to misinterpretation of your income statement.
There are different levels of profitability in an income statement and each tool measures profitability at a different level. EBIT margin measures profitability before interest expense and taxes are deducted. Profit margin or net profit margin measures profitability after income taxes and interest expense have been deducted.
The formula used to compute both margins are not the same. Subtracting cost of goods sold and operating expenses from sales and dividing the resulting figure by sales will yield the EBIT margin. Net profit margin is computed by deducting cost of goods sold, operating expenses, interest expense and taxes from sales.
EBIT is used when comparing operational efficiency and profitability of peer companies within the same industry. Since taxes vary by location and interest is not a part of day-to-day core operations, using EBIT allows comparison between companies on a level playing field. Net profit margin is used to measure how much profit is pocketed by the business owners. A business may be generating profit efficiently, but not all the profit goes to business owners since it must be shared with creditors and government.
EBIT is commonly used by business consultants, financial analyst, accountants and management to evaluate and assess performance levels in terms of operational efficiency and profitability to find ways to increase profit. The same parties also view a company's net profit margin, but creditors, investors and government entities use this tool more often to protect their interests. Banks may look at profit margins to ascertain paying capacity, tax auditors sometimes use this margin to see if your earnings are within industry parameters and financial analysts may be hired by investors to determine investment risks.