Which statement best defines EBIT margin?

• A. Net income divided by revenue
• B. EBIT divided by revenue
• C. Gross profit divided by revenue
• D. Operating cash flow divided by revenue

Answer: (B)

EBIT margin shows how much operating profit a company makes from each dollar of revenue, before financing and tax effects. It is computed as EBIT divided by revenue, where EBIT is earnings before interest and taxes (often called operating income). This means you’re looking at profit generated purely from operating activities, excluding interest expenses and income taxes.

This helps you compare how efficiently different companies run their operations, regardless of how they’re financed or taxed. The other common measures mix in items that EBIT margin excludes: net income margin includes interest and taxes, so it reflects financing structure and tax effects; gross profit margin only accounts for cost of goods sold and revenue, omitting operating expenses; operating cash flow margin uses cash flow rather than accounting profit, which can differ due to non-cash items.