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Profit before tax (PBT) is a measure of corporate profitability reported on a company’s income statement, describing earnings before taxes. Calculating PBT can provide useful information about a company’s operating efficiency and allow for comparison between companies subject to different tax laws. An investor should compare PBT to ensure apples are being compared to apples when choosing an investment.
Profit before tax, also known as PBT, is a measure of corporate profitability. It is an item reported on a company’s income statement that describes earnings before taxes. An investor might be interested in comparing the pre-tax earnings of two companies that are in the same industry but are subject to two different tax laws to determine their relative efficiency.
An income statement captures a company’s profitability over a period of time, typically a month, a quarter, or a year. In accounting, net income, or the bottom line on an income statement, is defined as a company’s total revenue minus total expenses during the given time period. Profit before taxes, which is sometimes called pre-tax earnings, is the penultimate line on an income statement.
Profit before taxes can be calculated from the bottom up or from the top down. If the final result is known, the net income minus income tax is the PBT. It can also be calculated by subtracting operating expenses, depreciation, and interest expense from gross income.
Calculating a company’s earnings before taxes can provide useful information about its operating efficiency. Unless tax laws change dramatically due to a change in policy or relocation, a business‘s income tax rate should remain proportional to its earnings. Changes in cost of sales, employee salaries, and research and development costs affect a company’s profitability regardless of taxes. A company’s efforts to control costs despite weakening sales can be analyzed by comparing its pre-tax earnings over a period of time.
An interested investor might also want to compare the pre-tax earnings of two competing companies if they are under different tax jurisdictions to ensure apples are being compared to apples when choosing an investment. For example, imagine that ABC Company reports $9.7 million US dollars (USD) in annual net revenue. Company XYZ may initially look less appealing by comparison, reporting just $9.5 million in net income.
An investor might prefer Company ABC unless comparing pre-tax earnings. Company XYZ could run smoothly with a corporate tax rate of 7%. Company ABC could be taking advantage of a temporary 3% tax incentive that will expire in a month, and the tax rate will return to 18%. The investor compares the PBT of both companies, $10 million for ABC company and $10.2 for XYZ company. The investor sees that the latter is a more efficient company with less tax risk and, therefore, a better investment.
Smart Asset.
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