How come EBIT does not include Interest Expense? I thought Interest expense is part of SG&A? Income Statement Sales 3000 Cost of Goods Sold (1000) Gross Profit 2000 SG&A 500 Interest Expense 151 EBT 1349 Taxes (30%) 405 Net Income 944 What is the operating profit margin? A) 0.50. B) 0.45. C) 0.67. D) 0.49. Your answer: B was incorrect. The correct answer was A) 0.50. Operating profit margin = EBIT/sales = 1,500/3,000 = 0.5
EBIT stands for Earnings Before Interest and Taxes. Interest Expense is not considered a part of operating expenses. A non-financial company pays interest on loans, which deals with financing, not operations.
Sometimes operating income is defined as EBIT, which only adds to the confusion. You just have to know it from the context of the question, and make sure you don’t include interest in EBIT (by definition).