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VMC: What Is EBIT Return on Assets?

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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%

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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.