I have been looking at the EOC questions of Intergration of Financial Statement analysis and Techniques and there is one I just can’t figure out how it’s being solved. So the question asks for the impact of removing the investments in Associates from the IS on the Interest coverage ratio. My thought was that this would affect EBIT -as non-operating items are above EBIT- and consequently the Interest Coverage ratio.
However, it seems that the CFA Institute defines operating income as EBIT. What do you guys think? Should I consider that EBIT = operating income for the exam?
Yes. I think they can be used interchangeably. EBIT=operating profit.
The curriculum’s stance on this becomes evident when calculating NOPAT, net operating profit after tax, which is EBIT(1-t). That mean OP, operating profit, must be EBIT.
It is EBIT at 98 % companies worldwide.
Thanks for the help guys.
@flashback, what happens when you have non operating income then? do you just calculate EBIT and then substract those? I haven’t seen that before.
In FS ussualy it looks like
(Depreciation and amort. expense)
- EBIT (Operating result)
Financial income (interest, currency gains, other financial gains)
(Financial expenses (interest, currency losses other financial expenses))
Other (extraordinary) income
(Other (extraordinary) expense)
(Income tax expense)
4 NET INCOME
If you have analyse data in this manner, no substracting required. Anyway, question would be by given EBT you have to calculate EBIT by backward method thus adding and/or substracting items. In both cases Other (extraordinary) and financial items shouldn’t be taken into account.
Not sure but I guess it varies from country to country or even from sector to sector. Anyways, many thanks for your comments! They have been very helpful!
The curriculum mentions that operating income and EBIT aren’t necessarily the same, but doesn’t go into the specifics of the differences.
Assume that they’re the same and be done with it.