Consider the following income statement for Amazon

a)

EBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income. EBIT is also sometimes referred to as operating income and is called this because it’s found by deducting all operating expenses (production and non-production costs) from sales revenue.

Dividing EBIT by sales revenue shows you the operating margin, expressed as a percentage (e.g., 15% operating margin). The margin can be compared to the firm’s past operating margins, the firm’s current net profit margin and gross margin, or to the margins of other, similar firms operating in the same industry.

EBIT Formula

Earnings Before Interest and Taxes can be calculated in two ways. The first is by starting with EBITDA and then deducting depreciation and amortization. Alternatively, if a company does not use the EBITDA metric, operating income can be found by subtracting SG&A (excluding interest but including depreciation) from gross profit.

Here are the two EBIT formulas:

EBIT = Net Income + Interest + Taxes

EBIT = EBITDA – Depreciation and Amortization Expense

Starting with net income and adding back interest and taxes is the most straightforward, as these items will always be displayed on the income statement. Depreciation and amortization may only be shown on the cash flow statement for some businesses.

In the Given table, EBIT shall be equal to Operating Income for all three years

EBIT = Sales Revenue - Operating Expenses

for 2015 = 107,006 - 104,773 = $ 2,233

for 2016 = 135,987 - 131,801 = $ 4,186

for 2017 = 177,866 - 173,760 = $ 4,106

b)

Earnings per share (EPS) is a figure describing a public company’s profit per outstanding share of stock, calculated on a quarterly or annual basis. EPS is arrived at by taking a company’s quarterly or annual net income and dividing by the number of its shares of stock outstanding. EPS is a basic yardstick of a company’s profitability and is used to tell investors whether the company is a safe bet.

There’s another way of calculating EPS called diluted earnings per share, which includes the value of convertible bonds and stock options if they were converted to stock in the number of outstanding shares. Calculations of diluted EPS factor in the effects of any action that causes more stock to be issued, but what actions are factored in varies depending on the accounting standard used.

Earnings per share is also major component in the price-to-earnings ratio calculation for valuing a company, which measures a company’s value as a factor of its current share price relative to its EPS.

Here, the EPS of Amazon.com is given in the table as

EPS = Net Income / Outstanding Stock

for 2015: Basic EPS = 596/467 = $ 1.28

Diluted EPS = 596/477 = $ 1.25

for 2016: Basic EPS = 2371/474 = $ 5.01

Diluted EPS = 2371/484 = $ 4.90

for 2017: Basic EPS = 3033/480 = $ 6.32

Diluted EPS = 3033/493 = $ 6.15