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What Is EBIT Return On Assets?

what is ebit return on assets

Definition of EBIT Return on Assets

  • EBIT return on asset measures the firm’s earnings before interest and tax with respect to the firm’s total asset.
  • The main focus on this ratio is the income and the total asset.
  • The reason EBIT is used and not net income is because EBIT focuses only on operating cash flows. 

What is the Formula for EBIT Return on Assets?

  • EBIT return on assets is calculated by dividing EBIT by average total assets.

EBIT return on assets = EBIT/ Average total asset 

  • EBIT is calculated by subtracting COGS and operating expenses from the revenue. 

                        EBIT = Revenue − COGS − Operating expenses

EBIT Return on Assets in Practice

  • Tex telecom has a revenue of $500,000, COGS of $350,000, other operating expenses of $90,000, and the total assets that the firm owns is $120,000. What is the EBIT return on the asset of Tex telecom? 
  • EBIT = $500,000 – $350,00 – $90,000 = $60,000
  • EBIT return on assets = $60,000 / $120,000 = 50%