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Profit before tax or earnings before tax is the indicator to assess a corporation's profit before tax payment. A company mentions it in its income statement, and its purpose is to evaluate the profitability of a company without considering tax expenses. Interested individuals can keep scrolling to know more about this concept.
Follow the step-wise guide mentioned below to calculate profit before tax:
So, the formula of profit before tax is as follows-
Profit before tax = revenue – expenses (excluding tax expenditures)
To make this concept easier for readers, here is an example using the formula of profit before tax:
Suppose Rai Services Pvt. Ltd. earns an operating revenue of ₹2,500 crores while its income from other sources is ₹500 crores. So, the total revenue is ₹3,000 crores.
It purchased raw material of ₹800 crores and invested ₹100 crores in stocks. Moreover, the cost of changing inventory of finished and unfinished goods is ₹100 crore, and expenses including amortisation and depreciation amount to ₹200 crores. Other expenses include – employee benefits (₹500 crores), financing costs (₹100 crores), tax expenditures (₹300 crores) and additional expenditures (₹200 crores).
So, the total cost of running a business before paying tax is ₹2,000 crores.
Therefore, the calculation of profit before tax is as follows:
|
Particulars |
Amount |
|
Total revenue |
₹3,000 crores |
|
Total expenditure |
₹2,000 crores |
|
Profit before tax (₹3,000-₹2,000) crores |
₹1,000 crores |
So, the pre-tax return on sales is 33.33%. This implies that Rai Services Pvt. Ltd. is generating earnings before tax of 33.33% for each ₹100 of its overall revenue.
Pre-tax returns is the total surplus revenue generated over incurring non-operating and operating expenditures, except tax expenses. It is evaluated by dividing EBT by the total revenue generated by a company.
Take a look at the following advantages of profit before tax:
Here are the disadvantages of calculating profit before tax:
It is crucial to understand the vital aspects of profit before tax. This is because it is an essential determinant for shareholders and other investors willing to invest in stocks of a company. Besides, it allows business owners to assess the profitability of a business venture.
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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