# What is Profit Before Tax (PBT)? – Profit Before Tax Formula with Example

## What is profit before tax?

Profit before tax or PBT is the gross profit that a business earns before income tax is applied. Other names of profit before tax include pre-tax profit and earnings before tax or EBT. The profit before tax value is found on the income statement which is generated either quarterly, half-yearly, or annually. The profit before tax value is used to determine how much tax the business has to pay based on its income. The profit before tax value is calculated based on a formula that takes into account the total revenue, operating expenses, interest expenses, and cost of goods sold.

## Significance of profit before tax

Profit before tax allows you to know and evaluate your profit margins. Profit margins allow you to understand the effectiveness of your ability to turn your revenue into profits. This is quite useful for the stakeholders of the business. Knowing the profit before tax value enables management to take valuable business decisions too. PBT also provides insight into how much tax will need to be paid by the business. Another benefit of the profit before tax value is that it is viewed along with the net profit and operating profit by the investors. This allows them to analyse your business and make decisions based on these values collectively.

## Formula to calculate profit before tax

The profit before tax formula is as follows.

Profit before tax = EBIT – Interest expenses

Or

Profit before tax = Revenue – Cost of goods sold – Operating expenses – Interest expenses

## Profit before tax example

Here is an example to show you how the profit before tax formula is calculated.

 Fiscal Year Ended Dec. 31 2021 Net Revenues Company-operated stores \$25,000 Others \$3,500 Total Net Revenues \$28,500 Cost of sales \$9,000 Store operating expenses \$5,500 Other operating expenses \$500 Depreciation expenses \$1,500 General and administrative expenses \$2,000 Total Operating Expenses \$9,500 Operating income \$19,000 Interest income \$500 Interest expense \$250 Profit Before Taxes \$10,250

The first calculation that we must do is to calculate the profit before tax is the total revenue earned by the business. To calculate this, you need to add up the revenue earned from store or stores that you operate and other revenues that you directly earn from running your business. In this case, this would be \$25,000 + \$3,500 for the first column which equals to \$28,500. If you have licensed stores, then you will add the revenue you earn from there to derive the total revenue.

 Net Revenues Company-operated stores \$25,000 Others \$3,500 Total Net Revenues \$28,500

The second calculation is the total operating expenses. In order to calculate the total, you need to add all the expenses associated with running the business. This includes running the store, depreciation expenses, and general and administrative expenses. Simply add up all the expenses and you have the total operating expenses. Let us calculate it for the first column. It would be \$5,500 + \$500 + \$1,500 + \$2,000 = \$9,500.

 Store operating expenses \$5,500 Other operating expenses \$500 Depreciation expenses \$1,500 General and administrative expenses \$2,000 Total Operating Expenses \$9,500

Next, we will calculate the other income that was earned. For example, in this case the business earned from interest income. Let us continue with the left column where the interest income is \$500. Now, we have all the required calculations to come to the profit before tax value. So, using the formula PBT = Revenue – Cost of goods sold (or cost of sales) – Operating expenses – Interest expenses, we can see that:

PBT = \$29,000 - \$9,000 - \$9,500 - \$250 = \$10,250

We added \$500 to the total revenue because interest income was earned and so this should also be a part of the calculation. If there was any gain from other ventures then the value will be added to the revenue as well. In this case, the total profit before tax is \$10,250.

 Revenue \$28,500 Interest income \$500 Total Revenue \$29,000 Cost of sales \$9,000 Operating expense \$9,500 Interest expense \$250 Profit Before Taxes \$10,250

## PBT vs. EBIT

The difference between PBT and EBIT will reveal the debt sensitivity of a business which can be vital for a business owner. Although on surface level, profit before tax and earnings before interest and tax seem similar, they are distinct in how they are calculated and their uses. Here are the top differences you should know between the two.