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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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