EBIT is an acronym for Earnings Before Interest and Taxes. Is is commonly used by investors to compare companies. EBIT is a measure of the profitability of the company. The larger the EBIT value, the more profitable the company is likely to be.

EBIT is used by investors because the tax structure and financing structure of the companies being compared may be very different. These accounting techniques could possibly affect the final profit amount and mask the actual operating efficiency of the firm. EBIT is used to find the most profitable company in terms of the efficiency of its operation.

Using EBIT allows an investor to ask, does company A make better use of its resources, and as a result get a better margin on its sales than company B? If so, then company A is likely to be a better investment over the long term since it is the more efficient company. Company B may make more money now because it has an advantage in its financing arrangement or taxation rate. Since these are subject to change in the future, Company B may lose their apparent advantage.

EBIT should not be used to evaluate a company in isolation. Even though a heavily leveraged company may appear profitable using EBIT, in actuality, it may be losing money when interest on its significant debt load is taken into account. Taxation can also have such a significant effect on the profitibility of a company that a seemingly promising company may be a poor investment choice if only the EBIT is considered.

The EBIT number is a good tool to provide an investor with insight into the companies being considered for investment. Which company is the most efficient? If the most profitable company is not the most efficient company is it still the better choice? Why? Can it increase operating efficiency enough that it becomes more profitable? What is the likelihood of the most efficient company getting a more beneficial tax or financing structure and then becoming much more profitable?