What is pre-tax profit?
Profit before tax (PBT) is a measure that examines the profits of a business before it has to pay corporate income tax. It deducts all expenses from income, including interest expense and operating expenses, with the exception of income tax.
Profit before tax (PBT)
Understanding profit before tax
PBT combines all of the company’s profits before taxes, including operational, non-operational, continuous and non-continuous activities. PBT exists because tax expenditures are constantly changing, and withdrawing it helps give investors a good idea of how a company’s profits or profits have changed from year to year. The term is interchangeable with “profit before tax” or “profit before tax”,
EBT can be entered in the income statement of a company. This is usually the third to the last line of the income statement because the second to the last line is the total income tax expense, followed by the total net income shown below.
Calculation of profit before tax
PBT includes all income earned regardless of source. This includes sales, commissions, service revenue and interest. All expenses are then deducted with the exception of corporate income tax. In addition, PBT can be calculated by taking the net income of an organization and adding the corporate income tax.
Usefulness of PBT
PBT is very useful for providing internal management and external users of financial data with the operational performance of a business. By excluding income tax, PBT minimizes an additional variable that may contain different indicators that influence the reading of financial data. For example, an industry can benefit from significant tax advantages which will have a positive influence on the net profit of an entity, while an entity subjected to unfavorable fiscal policies will be negatively influenced. The elimination of the income tax burden will allow a better comparison of the operations of these two companies, regardless of how tax policies define their results.
These tax differences may also exist strongly between businesses, as age, capital use and location will play a role in the amount of income tax a business has to pay. PBT eliminates any influence that a tax jurisdiction can have on a company’s financial information. Therefore, PBT is a performance measure that focuses on the general operations of a business. Although PBT can be used to compare any business, it is very useful when used in a single industry.
PBT vs EBIT vs EBITDA
While PBT contains all expenses except income tax, profit before interest and taxes (EBIT) eliminates an additional variable by excluding interest expense. These two levels are finer than earnings before interest, taxes, depreciation and amortization (EBITDA). The three calculations do not have to be declared by the Securities and Exchange Commission (SEC) because they comply with generally accepted accounting principles (GAAP). However, all three provide a more in-depth look at a company’s operations based on the smoothness of a desired level.