What Is EBIT/EPS Analysis?

EBIT/EPS analysis is a tool for showing how a company?s earnings before interest and taxes affect its earnings per share, and it is used to guide investment decisions. EBIT/EPS analysis is useful for showing the effect of a capital structure on a company?s risk levels and earnings.

EBIT, or operating income, is a financial indicator used to compare the performance of companies under different capital and tax frameworks. It excludes the effects of taxes, which vary from jurisdiction from jurisdiction, and interest rates, which vary based on the capital structure of the particular company. It is calculated by subtracting operating expenses and the cost of goods sold from revenue. Subtracting expenses related to depreciation and amortization from the result yields EBITDA, a widely used indicator that allows profitability to be compared without the effects of financing, accounting and taxes.

EPS is an profitability indicator that shows the amount of earnings available for each outstanding share. It is widely used in determining the price of shares and is used to compute the price to earnings ratio, another financial indicator in widespread use. EPS is calculated by subtracting dividends on preferred stock from net income and dividing the result by average outstanding shares. Another EPS variant is diluted EPS, which adds warrants outstanding and convertible shares to average outstanding shares.