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You calculate EBIT by taking gross margin and then subtracting or adding the different sources of costs and revenues associated with nonprimary business operations. Essentially, earnings before interest and taxes is the total amount the company made before lenders and the government get their hands on the company’s profits. It’s an important value for companies and investors to consider because this income statement item shows how much money the company is making and how much it has to pay in taxes. For example, a company that’s making less money this year than last year will pay less taxes. So, all in all, the earnings before interest and taxes determine whether a company can make money the way it’s currently operating.

The final portion of the income statement that lists costs and revenues is called net income and deals exclusively with taxes and interest. A company has to pay the taxes and interest charges that appear in this section, but the amounts due are often related to the amount of money the company makes. As a result, the company has to account for all other expenses and revenues before it can calculate these final items and determine the company’s total profits. Here’s a breakdown of what goes into net income: