Pretax Earnings

Pretax earnings (also called earnings before tax or EBT) are a company’s income after all operating expenses—including cost of goods sold, depreciation, interest, and other operating costs—have been deducted from revenue, but before income taxes are subtracted. Because it excludes taxes, pretax earnings help compare underlying profitability across companies, industries, and jurisdictions with different tax rules.

Key takeaways

• Pretax earnings measure a company’s profitability before tax effects.
• They are often seen as a more consistent indicator of operating performance than net income, which can be influenced by tax credits, carryforwards, and other tax items.
• Pretax earnings are used to calculate the pretax earnings margin, a common profitability ratio.

How pretax earnings are calculated

A common sequence on the income statement:
1. Revenue − Cost of goods sold = Gross profit
2. Gross profit − Operating expenses = Operating income (EBIT)
3. Operating income (EBIT) − Interest and nonoperating expenses = Pretax earnings (EBT)

In formula form:
EBT = Revenue − COGS − Operating expenses − Interest ± Nonoperating items

Example: If a company has $100 million in revenue and $90 million in total operating expenses (including depreciation and interest), pretax earnings = $100M − $90M = $10M.

Pretax earnings margin

The pretax earnings margin shows how much pretax profit a company generates per dollar of revenue.

Formula:
Pretax earnings margin = Pretax earnings ÷ Revenue

Example:
* Company ABC: Gross profit $100,000; operating + interest expenses $60,000; sales $500,000.
Pretax earnings = $100,000 − $60,000 = $40,000.
Pretax margin = $40,000 ÷ $500,000 = 8%.
* Company XYZ: Pretax earnings $50,000 on sales of $750,000.
Pretax margin = $50,000 ÷ $750,000 = 6.7%.
Even though XYZ has higher pretax earnings in dollars, ABC is more profitable relative to sales.

Pretax earnings vs. taxable income

• Pretax earnings (EBT) are an accounting measure shown on financial statements and follow accounting standards (e.g., GAAP or IFRS).
• Taxable income is computed according to tax laws and determines the actual taxes owed. Differences arise from items treated differently for accounting and tax purposes (timing differences, tax credits, depreciation methods, etc.).

Why analysts use pretax earnings

• Removes variability introduced by differing tax rates, credits, or one-time tax events.
• Facilitates comparisons across companies, industries, and countries.
• Offers a clearer view of core operating performance before tax policy effects.

Quick checklist to compute pretax earnings

1. Start with total revenue.
2. Subtract cost of goods sold to get gross profit.
3. Subtract operating expenses (including depreciation and amortization) to get operating income (EBIT).
4. Subtract interest and add/subtract nonoperating items to arrive at pretax earnings (EBT).

Conclusion

Pretax earnings provide a clear view of a company’s profitability from operations, excluding tax effects. They are useful for comparisons and for calculating margins that reflect operating strength independent of tax fluctuations.