# How to Calculate the Interest Expense With Net Income and EBIT

### Interest expense, net income, and EBIT are all used to assess the profitability of a business. Here's how to calculate them.

Nov 20, 2015 at 9:31AM

Interest expense, net income, and EBIT are three related financial metrics that all have to do with the profitability of a company. Here's what you need to know about calculating each one, and how they can be used to analyze a company's profitability.

Interest expense
Interest expense refers to the costs of borrowing money, and includes a company's interest payable on any bonds, loans, convertible debt, and lines of credit. It does not include other fixed payments, such as dividends on common or preferred stock.

Also not included in interest expense is any payment made toward the principal balance on the debt. For example, if a company paid \$1 million to its creditors, but \$200,000 went toward the principal, the interest expense is \$800,000.

Interest expense is included on the company's income statement, and represents the interest accrued during a certain time period, not necessarily the interest the company actually paid.

The simplest way to calculate interest expense is to multiply a company's debt by the average interest rate on its debts.

If a company has \$100 million in debt at an average interest rate of 5%, its interest expense would be \$100 million multiplied by 0.05, or \$5 million.

Net Income
Also referred to as the "bottom line" because of its location on an income statement, net income is the company's total earnings or profits after all expenses, depreciation, interest, and taxes are subtracted from the revenue.

Net income can give investors a good idea of how profitable a company was during a certain time period. It's also used to calculate earnings per share (EPS), which can be useful for calculating valuation metrics such as the price-to-earnings (P/E) ratio.

EBIT
EBIT stands for "earnings before interest and taxes," and is a non-GAAP number, meaning that it isn't found on the income statement. However, EBIT, which is also known as operating profit, can be a useful metric.

As the name implies, EBIT refers to a company's earnings (net income) with interest expense and taxes added back in. In other words, it ignores the variable expenses of interest and taxes, and only includes expenses related to the company's core business operations.

EBIT can be calculated in two ways:

For example, in the simplified income statement below, taxes are not listed as an expense. Therefore, the easiest way to determine EBIT would be to take the company's net income of \$177,000, and add the interest expense of \$14,000, resulting in EBIT of \$191,000.

EBIT is useful for determining a company's ability to make money, and is a popular metric used when companies consider a buyout of another. EBIT can show a company's earnings potential, while ignoring taxes and capital structure, which could both look completely different after an acquisition.

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# 4 in 5 Americans Are Ignoring Buffett's Warning

### Don't be one of them.

Jun 12, 2015 at 5:01PM

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.

The catch was: Attendees weren't allowed to record any of it. No audio. No video.

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than \$2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend.

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity.

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands."

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.