Earnings before taxes (EBT) is a company’s revenue minus expenses before taxes are taken out. A healthy EBT can help a company weather economic downturns, service debt obligations, and receive better interest rates from lenders. Investors use EBT to evaluate a company’s financial stability and predict investment returns.
Earnings before taxes, or EBT, is the amount of collected revenue received by a company, minus all company expenses, before taxes are taken from that revenue. The goal of most companies is to generate an acceptable amount of profit before taxes, which makes it possible not only to comply with current tax laws in terms of meeting tax obligations, but also to generate a certain amount of net profit once that all overdue debts be withdrawn. A business that posts a healthy pre-tax earnings rate is more likely to weather difficult economic periods, as that business has the ability to build cash reserves that help manage any temporary shortfalls caused by an economic downturn.
It’s important to note that earnings before taxes are not the same as earnings before interest and taxes, or EBIT. With the former, any money paid for interest is included in the final figure, while the latter also removes that interest from earnings. Both approaches are useful for understanding a company’s current financial position, and many companies will calculate EBIT first, then subtract interest to determine the earnings before tax amount.
Analysts view pre-tax earnings as important, as the number indicates a given business‘s ability to service debt obligations with available cash in the event the company is liquidated for any reason. A company that enjoys a reasonable amount of profit after paying its monthly obligations is more likely to be in a position to pay its debts in the long run. Businesses of this type are generally considered better risks for loans or lines of credit, and are likely to receive a better interest rate from lenders.
Investors tend to look closely at pre-tax earnings, as this figure provides important clues regarding the financial stability of the business. A business that has a strong financial footing means that the securities issued by that company are more likely to do well in the investment market. Periodic changes in the level of earnings before taxes are deducted can often provide clues regarding the type of return an investor can expect.
When those pre-tax earnings are more or less the same from one period to the next, this is a signal to investors that performance is likely to be consistent with a limited amount of volatility. When pre-tax earnings in successive periods tend to rise and fall, this is an indicator that performance will vary from time to time. Investors can evaluate this movement and determine if investing in that particular company is a good fit for their personal investment goals.
Smart Asset.
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