Definition of Profit before interest and taxes (PBIT)

Profit before interest and taxes (PBIT)

See EBIT.

fractional interest discount

the combined discounts for lack of control and marketability. g the constant growth rate in cash flows or net income used in the ADF, Gordon model, or present value factor.

Accrued interest

The accumulated coupon interest earned but not yet paid to the seller of a bond by the
buyer (unless the bond is in default).

After-tax profit margin

The ratio of net income to net sales.

Amortizing interest rate swap

Swap in which the principal or national amount rises (falls) as interest rates
rise (decline).

Asymmetric taxes

A situation wherein participants in a transaction have different net tax rates.

Base interest rate

Related: Benchmark interest rate.

Before-tax profit margin

The ratio of net income before taxes to net sales.

Benchmark interest rate

Also called the base interest rate, it is the minimum interest rate investors will
demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on a
comparable-maturity Treasury security that was most recently issued ("on-the-run").

Best-interests-of-creditors test

The requirement that a claim holder voting against a plan of reorganization
must receive at least as much as he would have if the debtor were liquidated.

Book profit

The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.

Capitalized interest

interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.

Cash flow after interest and taxes

Net income plus depreciation.

Compound interest

interest paid on previously earned interest as well as on the principal.

Covered interest arbitrage

A portfolio manager invests dollars in an instrument denominated in a foreign
currency and hedges his resulting foreign exchange risk by selling the proceeds of the investment forward for
dollars.

Deferred taxes

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to cover tax liabilities that have not yet been paid.

Earnings before interest and taxes (EBIT)

A financial measure defined as revenues less cost of goods sold
and selling, general, and administrative expenses. In other words, operating and non-operating profit before
the deduction of interest and income taxes.

Effective annual interest rate

An annual measure of the time value of money that fully reflects the effects of
compounding.

Equilibrium rate of interest

The interest rate that clears the market. Also called the market-clearing interest
rate.

Forward interest rate

interest rate fixed today on a loan to be made at some future date.

Gross interest

interest earned before taxes are deducted.

Gross profit margin

Gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.

Interest

The price paid for borrowing money. It is expressed as a percentage rate over a period of time and
reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property.

Interest coverage ratio

The ratio of the earnings before interest and taxes to the annual interest expense. This
ratio measures a firm's ability to pay interest.

Interest coverage test

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's
interest coverage would, as a result of the issue, fall below some specified minimum.

Interest equalization tax

Tax on foreign investment by residents of the U.S. which was abolished in 1974.

Interest payments

Contractual debt payments based on the coupon rate of interest and the principal amount.

Interest on interest

interest earned on reinvestment of each interest payment on money invested.
See: compound interest.

Interest-only strip (IO)

A security based solely on the interest payments form a pool of mortgages, Treasury
bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop
and the value of the IO falls to zero.

Interest rate agreement

An agreement whereby one party, for an upfront premium, agrees to compensate the
other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined
level (the strike rate).

Interest rate cap

Also called an interest rate ceiling, an interest rate agreement in which payments are made
when the reference rate exceeds the strike rate.

Interest rate ceiling

Related: interest rate cap.

Interest rate floor

An interest rate agreement in which payments are made when the reference rate falls
below the strike rate.

Interest rate on debt

The firm's cost of debt capital.

Interest rate parity theorem

interest rate differential between two countries is equal to the difference
between the forward foreign exchange rate and the spot rate.

Interest rate risk

The risk that a security's value changes due to a change in interest rates. For example, a
bond's price drops as interest rates rise. For a depository institution, also called funding risk, the risk that
spread income will suffer because of a change in interest rates.

Interest rate swap

A binding agreement between counterparties to exchange periodic interest payments on
some predetermined dollar principal, which is called the notional principal amount. For example, one party
will pay fixed and receive variable.

Interest subsidy

A firm's deduction of the interest payments on its debt from its earnings before it calculates
its tax bill under current tax law.

Interest tax shield

The reduction in income taxes that results from the tax-deductibility of interest payments.

Net profit margin

Net income divided by sales; the amount of each sales dollar left over after all expenses
have been paid.

Nominal interest rate

The interest rate unadjusted for inflation.

Open interest

The total number of derivative contracts traded that not yet been liquidated either by an
offsetting derivative transaction or by delivery. Related: liquidation

Operating profit margin

The ratio of operating margin to net sales.

Pooling of interests

An accounting method for reporting acquisitions accomplished through the use of equity.
The combined assets of the merged entity are consolidated using book value, as opposed to the purchase
method, which uses market value. The merging entities' financial results are combined as though the two
entities have always been a single entity.

Profit margin

Indicator of profitability. The ratio of earnings available to stockholders to net sales.
Determined by dividing net income by revenue for the same 12-month period. Result is shown as a
percentage.

Profitability index

The present value of the future cash flows divided by the initial investment. Also called
the benefit-cost ratio.

Profitability ratios

Ratios that focus on the profitability of the firm. profit margins measure performance
with relation to sales. Rate of return ratios measure performance relative to some measure of size of the
investment.

Rate of interest

The rate, as a proportion of the principal, at which interest is computed.

Real interest rate

The rate of interest excluding the effect of inflation; that is, the rate that is earned in terms
of constant-purchasing-power dollars. interest rate expressed in terms of real goods, i.e. nominal interest rate
adjusted for inflation.

Risk-adjusted profitability

A probability used to determine a "sure" expected value (sometimes called a
certainty equivalent) that would be equivalent to the actual risky expected value.

Short interest

This is the total number of shares of a security that investors have borrowed, then sold in the
hope that the security will fall in value. An investor then buys back the shares and pockets the difference as profit.

Simple interest

interest calculated only on the initial investment. Related:compound interest.

Spot interest rate

interest rate fixed today on a loan that is made today. Related: forward interest rates.

Stated annual interest rate

The interest rate expressed as a per annum percentage, by which interest
payment is determined.

Times-interest-earned ratio

Earnings before interest and tax, divided by interest payments.

True interest cost

For a security such as commercial paper that is sold on a discount basis, the coupon rate
required to provide an identical return assuming a coupon-bearing instrument of like maturity that pays
interest in arrears.

GROSS PROFIT

The profit a company makes before expenses and taxes are taken away.

PROFIT

What’s left over after you subtract the cost of goods sold and all your expenses from sales.

Controllable profit

The profit made by a division after deducting only those expenses that can be controlled by the
divisional manager and ignoring those expenses that are outside the divisional manager’s control.

Cost–volume–profit analysis (CVP)

A method for understanding the relationship between revenue, cost and sales volume.

Earnings before interest and taxes (EBIT)

The operating profit before deducting interest and tax.

Earnings before interest, taxes, depreciation and amortization (EBITDA)

The operating profit before deducting interest, tax, depreciation and amortization.

Gross profit

The difference between the price at which goods or services are sold and the cost of sales.
Income The revenue generated from the sale of goods or services.

Interest

The cost of money, received on investments or paid on borrowings.

Net profit

See operating profit.

Operating profit

The profit made by the business for an accounting period, equal to gross profit less selling, finance, administration etc. expenses, but before deducting interest or taxation.

Profit

The difference between income and expenses.

Profit and Loss account

A financial statement measuring the profit or loss of a business – income less expenses – for an accounting period.

Profit centre

A division or unit of an organization that is responsible for achieving profit targets.

Profitability index

See cash value added.

Retained profits

The amount of profit after deducting interest, taxation and dividends that is retained by the business.

Gross profit

The result of subtracting cost of goods sold from sales. Synonymous with gross margin.

Interest income

Income that a company receives in the form of interest, usually as the result of keeping money in interest-bearing accounts at financial institutions and the lending of money to other companies.

Interest payable

The amount of interest that is owed but has not been paid at the end of a period.

Payroll taxes payable

The amount of payroll taxes owed to the various governments at the end of a period.

cash flow from operating activities, or cash flow from profit

This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.

earnings before interest and income tax (EBIT)

A measure of profit that
equals sales revenue for the period minus cost-of-goods-sold expense
and all operating expenses—but before deducting interest and income
tax expenses. It is a measure of the operating profit of a business before
considering the cost of its debt capital and income tax.

gross margin, or gross profit

This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.

operating profit

See earnings before interest and income tax (EBIT).

profit

The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.

profit and loss statement (P&L statement)

This is an alternative moniker
for an income statement or for an internal management profit report.
Actually, it’s a misnomer because a business has either a profit or a loss
for a period. Accordingly, it should be profit or loss statement, but the
term has caught on and undoubtedly will continue to be profit and loss
statement.

profit module

This concept refers to a separate source of revenue and
profit within a business organization, which should be identified for
management analysis and control. A profit module may focus on one
product or a cluster of products. profit in this context is not the final, bottom-
line net income of the business as a whole. Rather, other measures
of profit are used for management analysis and decision-making purposes—
such as gross margin, contribution margin, or operating profit
(earnings before interest and income tax).

profit ratios

Ratios based on sales revenue for a period. A measure of
profit is divided by sales revenue to compute a profit ratio. For example,
gross margin is divided by sales revenue to compute the gross margin
profit ratio. Dividing bottom-line profit (net income) by sales revenue
gives the profit ratio that is generally called return on sales.

times interest earned

A ratio that tests the ability of a business to make
interest payments on its debt, which is calculated by dividing annual
earnings before interest and income tax by the interest expense for the
year. There is no particular rule for this ratio, such as 3 or 4 times, but
obviously the ratio should be higher than 1.

Accrued Interest

The amount of interest accumulated on a debt security between
interest paying dates

Compound Interest

interest paid on principal and on interest earned in previous
periods

Effective Interest Rate

The rate of interest actually earned on an investment. It is
calculated as the ratio of the total amount of interest actually
earned for one year divided by the amount of the principal.

Nominal Interest Rate

The rate of interest quoted, or stated, to be paid on a security

Profit Margin Ratio

A measure of how much profit is earned on each dollar of sales. It
is calculated by dividing the net income available for distribution to
shareholders by the total sales generated during the period.

Profitability Index

A method for determining the profitability of an investment. It is
calculated by dividing the present value of the future net cash flows
by the initial cash investment.

Real Interest Rate

The rate of interest paid on an investment adjusted for inflation

Simple Interest

interest paid only on the principal; calculated by multiplying the
interest rate by the principal

Times Interest Earned Ratio

A measure of how well a company is able to meet its interest
payments based on the cash generated by its operations. It is
calculated by dividing the earnings before interest and taxes by the
total interest charges incurred by the firm.

compound interest

a method of determining interest in which interest that was earned in prior periods is added to the original investment so that, in each successive period, interest is earned on both principal and interest

cost-volume-profit (CVP)

analysis a procedure that examines
changes in costs and volume levels and the resulting
effects on net income (profits)

phantom profit

a temporary absorption costing profit caused
by producing more inventory than is sold

profit center

a responsibility center in which managers are responsible for generating revenues and planning and controlling all expenses

profit margin

the ratio of income to sales

profit sharing

an incentive payment to employees that is
contingent on organizational or individual performance

profit-volume graph

a visual representation of the amount
of profit or loss associated with each level of sales

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