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EBIT-EPS Analysis

EBIT-EPS analysis evaluates various financing alternatives and levels of earnings before interest and taxes (EBIT) to determine the plan that maximizes earnings per share (EPS). It examines the effect of financial leverage on EPS. EBIT-EPS analysis is useful for selecting an optimal debt-equity mix and determining the most profitable financing plan or EBIT level. Indifference points indicate the EBIT level at which a more or less leveraged plan will generate higher EPS.

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Siva Sankari
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623 views18 pages

EBIT-EPS Analysis

EBIT-EPS analysis evaluates various financing alternatives and levels of earnings before interest and taxes (EBIT) to determine the plan that maximizes earnings per share (EPS). It examines the effect of financial leverage on EPS. EBIT-EPS analysis is useful for selecting an optimal debt-equity mix and determining the most profitable financing plan or EBIT level. Indifference points indicate the EBIT level at which a more or less leveraged plan will generate higher EPS.

Uploaded by

Siva Sankari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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EBIT-EPS Analysis

• EBIT-EPS analysis gives a scientific basis for


comparison among various financial plans and
shows ways to maximize EPS. Hence EBIT-EPS
analysis may be defined as ‘a tool of financial
planning that evaluates various alternatives of
financing a project under varying levels of EBIT
and suggests the best alternative having
highest EPS and determines the most
profitable level of EBIT’.
Concept of EBIT-EPS Analysis:

• The EBIT-EBT analysis is the method that


studies the leverage, i.e. comparing
alternative methods of financing at different
levels of EBIT. Simply put, EBIT-EPS analysis
examines the effect of financial leverage on
the EPS with varying levels of EBIT or under
alternative financial plans.
• Determining Optimum Mix:
•
EBIT-EPS analysis is advantageous in selecting the
optimum mix of debt and equity. By emphasizing on
the relative value of EPS, this analysis determines
the optimum mix of debt and equity in the capital
structure. It helps determine the alternative that
gives the highest value of EPS as the most profitable
financing plan or the most profitable level of EBIT as
the case may be.
Indifference Points:

• The indifference point, often called as a breakeven


point, is highly important in financial planning
because, at EBIT amounts in excess of the EBIT
indifference level, the more heavily levered financ­
ing plan will generate a higher EPS. On the other
hand, at EBIT amounts below the EBIT indifference
points the financing plan involving less leverage will
generate a higher EPS.
• The indifference point may be obtained by
solving equations.

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