What is Profit Before Tax?

Profit before tax, also known as PBT, is a measure of corporate profitability. It is an item reported on a company’s income statement that describes pre-tax earnings. An investor might be interested in comparing the profit of two companies before tax that are in the same industry but subjected to two different tax laws in order to determine their relative efficiency.

An income statement captures a company’s profitability over a period of time, typically a month, a quarter or a year. In accounting, net income, or the bottom line of an income statement, is defined as a company’s total revenues minus total expenses during the given time period. Profit before tax, which is sometimes called earnings before tax, is the second to last line in an income statement.

Profit before tax can be calculated from the bottom up or from the top down. If the bottom line is known, net income minus income tax is the PBT. It can also be calculated by subtracting operating expense, depreciation, and interest expense from the gross revenue.

Calculating a company’s earnings before tax can provide useful information about its operational efficiency. Unless tax laws shift dramatically because of a change in politics or relocation, a company’s income tax rate should remain proportional to its earnings. Changes in costs of sales, employee salaries and research and development costs impact a company’s profitability independently of taxes. A company’s efforts to reign in costs despite weakened sales can be analyzed by comparing its profit before tax over a period of time.

An interested investor might also want to compare the profits of two competing companies before tax if they are under different tax jurisdictions to ensure that apples are being compared with apples when choosing an investment. For instance, imagine company ABC reports $9.7 million US Dollars (USD) in annual net income. Company XYZ may initially seem less attractive in comparison, reporting only $9.5 million USD in net income.

An investor might prefer the company ABC unless he compares profits before tax. Company XYZ might be a smoothly run operation with a corporate tax rate of 7%. Company ABC might be taking advantage of a temporary 3% tax incentive that will expire in a month, and the tax rate will return to 18%. The investor compares the PBT of both companies, $10 million USD for company ABC, and $10.2 for company XYZ. The investor sees that the latter is a more efficient company with less tax risk, and thus a better investment.