EBIT EPS Analysis

EBIT-EPS analysis is a financial analysis tool used to evaluate the impact of financing decisions on a company’s earnings per share (EPS). It is particularly useful in analyzing the effects of leverage on a company’s profitability.

The analysis involves calculating the effect of a change in earnings before interest and taxes (EBIT) on EPS, assuming a constant level of debt financing. By doing so, companies can evaluate the potential impact of different financing structures on their EPS.

The process of EBIT-EPS analysis involves the following steps:

Calculate the company’s EBIT at different levels of sales or operating income.

Determine the company’s fixed financial costs, including interest expenses, preferred dividends, and any other fixed financing costs.

Calculate the EPS for each level of EBIT by subtracting fixed financial costs from EBIT, dividing the result by the number of shares outstanding, and adding any dilutive securities.

Plot the results on a graph to identify the level of EBIT where EPS is maximized.

The graph shows the impact of different financing structures on EPS, assuming that all other factors remain constant. It helps the company to determine the most appropriate financing structure to maximize EPS.

EBIT-EPS analysis can be used to evaluate different scenarios, such as increasing or decreasing debt financing, issuing new shares, or purchasing shares back. It can also be used to determine the level of risk associated with different financing structures and to evaluate the company’s ability to meet its financial obligations.

Overall, EBIT-EPS analysis is a valuable tool in determining the impact of financing decisions on a company’s profitability and risk. It allows companies to evaluate different financing structures and make informed decisions to maximize their EPS.