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.
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.
The profit before tax formula is as follows.
Profit before tax = EBIT – Interest expenses
Profit before tax = Revenue – Cost of goods sold – Operating expenses – Interest expenses