Mastering Earnings Before Interest After Taxes (EBIAT): Insights on Profitability
Earnings Before Interest After Taxes (EBIAT) is a crucial financial measure used to evaluate a company’s profitability over a specific period, such as a quarter or a year. It is calculated by deducting taxes from the company’s Earnings Before Interest and Taxes (EBIT).
EBIAT is a non-GAAP metric, meaning it isn’t governed by generally accepted accounting principles (GAAP). As a result, it’s not mandatory for external reporting or public disclosures, which implies that companies can calculate it in various ways. This variance can complicate comparisons across different businesses.
Despite its non-standardized nature, EBIAT remains a useful metric for internal management and investors. It assists in making vital decisions, such as determining the extent of investment necessary for future growth.
Key Takeaways
- Profitability Insight: EBIAT is a non-GAAP financial metric providing insights into a company’s profitability.
- Includes Tax Expenses: Unlike other metrics, it accounts for taxes as an expense.
- Tax Burden Reflection: EBIAT is particularly relevant for businesses with substantial tax liabilities due to its inclusion of taxes.
- Comprehensive Analysis: Investors should use EBIAT alongside other metrics for a well-rounded financial evaluation.
Understanding EBIAT
EBIAT primarily gauges the cash a company has to meet its debt obligations, excluding debt interest while including tax expenses. Taxes are inevitable, and including them makes EBIAT a realistic measure of available cash to repay obligations.
EBIAT becomes particularly relevant when analyzing companies with significant tax liabilities, as it reflects the company’s tax burden accurately, providing a genuine view of its financial standing.
How to Calculate EBIAT
The formula for EBIAT involves multiplying a company’s EBIT by (1 - Tax rate), as follows:
Example Calculation:
- Sales Revenue: $1,000,000
- Non-operating income: $30,000
- Cost of Goods Sold: $200,000
- Depreciation and Amortization: $75,000
- Selling, General, and Administrative Expenses: $150,000
- Other Miscellaneous Expenses: $20,000
- One-time Special Expense: $50,000
EBIT Calculation:
EBIT = Revenues - Operating Expenses + Non-Operating Income
EBIT = $1,000,000 - ($200,000 + $75,000 + $150,000 + $20,000 + $50,000) + $30,000 = $535,000
With a tax rate of 30%, EBIAT is calculated as:
EBIAT = EBIT x (1 - Tax Rate) = $535,000 x (1 - 0.3) = $374,500
Analysts might exclude one-time special expenses for a more nuanced analysis:
- EBIT without special expense = $585,000
- EBIAT without special expense = $409,500
EBIAT vs. EBITDA vs. EBIT: Key Differences
Comparing EBIAT with similar metrics \u2013 EBITDA and EBIT \u2013 reveals their unique focuses:
- EBIAT: Earnings after accounting for taxes, but before interest expenses.
- EBITDA: Includes depreciation and amortization; more widely used than EBIAT.
- EBIT: Excludes both interest and taxes, aligning closely with operating income.
Understanding these differences allows for a more accurate assessment of a company’s financial health.
Using Non-GAAP Metrics Wisely
Investors should be cautious with non-GAAP measurements like EBIAT, EBITDA, and EBIT, as companies may use them to project a favorable financial picture. For instance, Pinterest converted a GAAP loss into a non-GAAP profit by adjusting certain costs.
The Bottom Line
Overall, EBIAT is one of many metrics available for evaluating a company’s profitability and financial stability. It offers valuable insights, especially about tax liabilities, but as a non-GAAP metric, it may vary across different entities.
For comprehensive analysis, stakeholders should consider EBIAT along with other non-GAAP metrics such as EBITDA and EBIT, and GAAP metrics like net income, operating income, and cash flow to get a balanced view of a company’s true financial health.
Related Terms: EBIT, EBITDA, Net Income, Operating Income, Cash Flow.
References
- U.S. Securities and Exchange Commission. “Non-GAAP Financial Measures”.
- Harvard Business Review. “Mind the GAAP”.
