Earnings Before Interest After Taxes (EBIAT)

Earnings before interest after taxes is one of a number of financial measures of a firm’s profitability.

What is EBIAT?

EBIAT is a financial measure of a firm’s profitability that removes the tax benefit of any financial leverage (i.e., debt financing) the firm uses.  It is often used as an after-tax measure of a firm’s profits from operations, taking into account what taxes would be if the firm had no interest expense deductions and assuming that the firm has no non-operating income or expenses. Because interest expense is tax deductible, it creates what is referred to as a “tax shield,” shielding a portion of the firm’s operating profit from taxation.  EBIAT eliminates this tax shield, indicating what the profits of the firm would be if the firm had to pay tax on 100% of its profits.

When is EBIAT used?

EBIAT is useful when comparing a firm’s profitability with that of its competitors since the competitor firms may differ in the amount of debt financing it uses.  (This assumes that the competitors all operate in the same tax environment, of course.)  It is also useful in comparing a firm’s current profitability with its profitability in past years if the firm has modified the amount of debt financing it uses.

In the absence of non-operating income and expenses, EBIAT is also the basis for calculating the Free Cash Flow of a firm, which is, in turn, used to determine a firm’s value.  Free cash flow is the amount of cash flow a firm generates that exceeds the amount needed to maintain its existing production capabilities and is calculated by taking the net operating cash flow and adding back any depreciation and amortization expenses and subtracting capital expenditures and changes in the net working capital accounts.

EBIAT Formula/Calculation

Earnings before interest after taxes is calculated by multiplying the firm’s earnings before interest and taxes by 1.0 minus the firm’s tax rate:

EBIAT = EBIT(1.0 –tax rate)

To illustrate, consider the income statement of the hypothetical Inmar Corporation provided on the following page:

INMAR CORPORATION Income Statement for the year ending December 31,
(amounts in thousands) 2016
Sales $22,000
Cost of goods sold 14,300
Gross profit $7,700
Other operating expenses:
   Selling costs ($1,200)
  Depreciation ($800)
 Other operating expenses: ($700)
Total operating expenses ($2,700)
Operating income (EBIT) $5,000
Interest expense $1,200
Earnings before taxes (EBT) $3,800
Taxes paid $1,520
Net income $2,280

Tax rate = $1,520/$3,800 = 0.40 = 40%

The EBIT is provided on the income statement.  It is $5,000.  Since EBIAT = EBIT(1 – tax rate), we can now calculate the EBIAT for Infonext:

EBIAT = $5,000(1 – 0.4) = $3,000

Difference Between EBIAT and NOPAT (Net Operating Profit After Tax)

EBIAT is used as a proxy for net operating profit after tax (NOPAT).  The two numbers are often the same, assuming a consistent treatment of operating and financing activities and the correct treatment of taxes.  If there are any non-operating expenses, however, these must be added back to arrive at Net Operating Profit.  It is also important to remember that the calculation should use actual cash taxes paid, which is not necessarily the same as the “provision for taxes” shown on the income statement. To illustrate, consider the following income statement for the Infonext Corporation:

INFONEXT CORPORATION Income Statement for the year ending December 31
(amounts in thousands) 2016
Sales $28,600
Cost of goods sold $18,590
Gross profit $10,010
Other operating expenses:
   Selling costs ($1,560)
  Depreciation ($1,040)
 Other operating expenses: ($910)
Total operating expenses ($3,510)
Operating income $6,500
Non-operating expenses $650
Interest expense $700
Earnings before taxes (EBT) $5,150
Provision for taxes $1,520
Net income $3,630

To calculate NOPAT, we begin with Infonext’s operating income (which is just another name for “operating profit”) of $6,500.
EBIAT = $5,850 x (1 – 0.5) = $2,925

NOPAT = $6,500 x (1 – 0.5) = $3,250

The net operating profit after tax for Infonext is higher than its earnings before interest after taxes since NOPAT does not include the non-operating expenses of the firm in its calculation.