How is EBIT calculated?

EBIT, or Earnings Before Interest and Taxes, is a measure of a firm's profitability that focuses on its core operations. It is calculated by adding interest expenses and tax expenses back to net income. This approach provides a clearer picture of the company's operational efficiency and performance by isolating earnings from financing and tax considerations.

Starting from the net income, which reflects the profit after all expenses, including interest and taxes, the calculation of EBIT reverts these costs to focus solely on earnings derived from operating activities. By including interest and tax expenses in this calculation, one can evaluate the performance of the business without the effects of its capital structure and tax obligations. This is particularly useful for comparing companies across different regions and industries, as tax structures and financing strategies can vary significantly.

The other options presented do not align with the established definition of EBIT. Total revenue minus operating expenses refers to the calculation of operating income, while the subtraction of total liabilities from total assets describes equity, and subtracting extraordinary items from operating profit does not provide a standardized calculation for EBIT. These distinctions illustrate why the correct answer is significant in understanding the underlying earnings potential of a business.