Calculating Business Profit: EBIT, PBT, and Financial Reporting

Net Income and Financial Results

Understanding the Profit and Loss Account

The main purpose of any business is making profits. Profits are calculated by finding the difference between revenue and expenditure. Profits are realized only when revenues exceed expenditures; otherwise, the result will be losses.

The Income Statement (or Profit and Loss Account) reflects, in an orderly manner, all income and expenses that have occurred in the company during the financial year. The final outcome is obtained by calculating the difference between these totals.

Structure of the Profit and Loss Account

While the Balance Sheet data is grouped into assets, shareholders' equity, and liabilities, the Income Statement focuses on debits (expenses) and credits (revenue). Expenses must be debited, and revenue must be credited.

Analyzing Company Results

The results can be positive (profit) or negative (losses).

Operating Income (EBIT)

Operating Income (EBIT) reflects the income and expenses arising from the regular, core business activities of the company. EBIT stands for Earnings Before Interest and Taxes.

Formula: EBIT = Operating Revenue - Operating Costs

Financial Result

The Financial Result is derived from financial income and financial charges.

Examples of financial income include interest earned from bank accounts, stock market returns, and treasury bills. Financial expenses include interest paid on loans and other debts owed by the company.

Formula: Financial Result = Financial Income - Financial Charges

Profit Before Tax (PBT)

Profit Before Tax (PBT) is obtained by adding the Operating Result (EBIT) and the Financial Result. PBT means Profit Before Tax.

Formula: PBT = EBIT + Financial Result

Net Profit for the Year (NP)

Net Profit for the Year (NP or BN) is the final result after the payment of corporate taxes. It is also known as Net Income.

For companies, the main tax is Corporate Income Tax, typically calculated as a percentage of Profit Before Tax (e.g., 30% generally, or 25% for SMEs).

Formula: Net Profit (NP) = PBT - Corporate Tax

The Annual Report (Notes to the Accounts)

The Annual Report (or Notes to the Accounts) is a document whose purpose is to complement, extend, and explain the information contained in the Balance Sheet, the Profit and Loss Account, and the valuation of equity. Key points typically covered include:

• Business activity description.
• Basis of presentation of annual accounts (Accounting Policies).
• Application of results: specifying the destination of profits, including the percentage distributed as dividends (money paid to each shareholder per share) and the amount allocated to various types of reserves.
• Details regarding tangible, intangible, and real estate assets.
• Changes in Equity.
• Detailed breakdown of income and expenses.

Statement of Changes in Equity

The Statement of Changes in Equity reports the movements experienced by the company's equity. These changes arise from the results obtained during the financial year or from other issues, such as transactions with shareholders (members).