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Measures of accounting profit

Measures of accounting profit

Companies make use of several different measures of profit, and each company will have its own preference. It is important to understand this preference, because as the well-known adage goes, ‘you get what you measure’. This is especially the case when bonuses are contingent on achieving a particular year end profit target. Commonly used profit measures include:

  • EBITDA – earnings before interest, tax, depreciation, amortisation of goodwill, sometimes known as gross cash profits
  • EBIT (or PBIT) – earnings (or profit) before interest and tax
  • EBT (or PBT) – earnings (or profit) before tax
  • Earnings – profit after tax

Measures of accounting profit, nevertheless, suffer from a number of important to be aware of limitations.

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