What are Earnings Before Taxes?

Earnings before taxes is a measure of the earnings generated by a business before making any tax payments to the government. This measure includes the results of both operations and any financing activities, such as the cost of debt, and so is a good measure of the aggregate results of a business. It is a useful measure for investors and analysts, who can use it to compare the results of businesses located in different tax jurisdictions. Since tax rates vary by jurisdiction, the earnings before taxes number normalizes reported earnings for easier comparison.

How to Calculate Earnings Before Taxes

To calculate earnings before taxes, subtract the cost of goods sold and all operating expenses from the net sales of the reporting entity.

Presentation of Earnings Before Taxes

Earnings before taxes appears as a separate line item near the bottom of the income statement, prior to any adjustments for taxes. A sample of this presentation appears in the following exhibit.