Meaning of Profit before tax (PBT)
Also known as Earnings Before Tax (EBT), Profit Before Tax (PBT) is the measure of the company’s profit before the payment of corporate income tax. It is listed on the income statement of the company. The primary purpose was for the company owners to estimate how much profit the company is really making without factoring in varying tax rates and structures.
Calculation of PBT
- One must first collect financial data about the different sources of revenue for the company which would include rental income, discounts received, service income, interest earned on bank accounts, bonuses and total sales.
- One must then evaluate the deductible expenses incurred by the company such as rent, debt, utilities, charitable contributions, health expenses, accrued wages and the cost of goods sold.
- Then the deductible expenses must be deducted from the earned income to get the earnings or profit before tax.
- Earnings before interest and taxes (EBIT) – interest expense = PBT
Significance of PBT
- Company owners are able to compare the operations of different companies regardless of the existing tax laws.
- Unlike profit after tax which is geared towards profitability calculation, PBT measures the performance of the company.
- Profit before tax also acknowledges the debt obligations of a company.
Disadvantages of PBT measure
- Make for a skeptical valuation of the company as there is no true account of company’s free cash flow.
- PBT is not a complete measure for comparison purpose as the operations of companies under consideration is not similar in nature and scale.
- It becomes difficult to gauge the bottom line of companies operating in different business settings.
Difference between EBIT and PBT
- EBIT is operating income on the income statement, whereas PBT is the taxable income.
- EBIT represents the profit your company makes after paying its operating expenses, but before paying income taxes and interest on debt. PBT equals EBIT minus interest expense plus interest income from investments and cash holdings, such as bank accounts.
