What is the profit before tax?
Profit before tax, also known as PBT, is the measure of the company's profitability. It is an item reported in the profit and loss statement that describes the income before tax. The investor could be interested in comparing the profits before the taxation of two companies that are in the same industry, but are subject to two different tax laws to determine their relative efficiency.
The profit and loss statement captures the profitability of the company for a certain period of time, usually a month, quarter or year. In accounting, the net income or lower limit of the profit and loss statement is defined as the overall income of the company minus the total expenditure of the company in a given period of time. Profit before tax, which is sometimes called earnings before tax, is the second to the last line in the statement of profit and loss.
The tax profit can be calculated from bottom to top or from top to bottom. If the lower line is known, net income minus income tax is PBT. It can also be calculated by deducting operating costs, depreciation and interest costs fromgross income.
Calculation of the company's income can provide useful information about its operating efficiency. If the tax laws are dramatically shift due to a change in policy or relocation, the income tax rate should remain proportional to their earnings. Changes in the cost of sales, salaries and development of employees and the cost of research and development affect the profitability of the company independently of taxes. The company's efforts to government costs despite weakened sales can be analyzed by comparing its profit before tax for a certain period of time.
Those interested might also want to compare the profits of two competing companies before tax, if they are under various tax jurisdictions to ensure that apples are compared with apples when choosing an investment. Imagine, for example, that ABC reports $ 9.7 million in the US (USD) an annual net income. XYZ may initially seem less attractive in comparisonand show a net income of only $ 9.5 million.
The investor may prefer ABC if it does not compare profits to tax. XYZ can be a fluent operation with a 7%income tax rate. ABC can use a temporary 3% tax incentive that expires in a month, and the tax rate will return to 18%. The investor compares the PBT of both companies, $ 10 million USD for ABC and $ 10.2 for XYZ. The investor sees that the latter is a more efficient company with less tax risk and thus a better investment.