KEY TAKEAWAYS

 Calculating NOI involves subtracting operating expenses from a property's revenues.

 Calculating EBIT uses the same equation, but depreciation and amortization are
included
 Income taxes do not impact a company's NOI or EBIT, but property taxes are included in
the equation.
 Operating expenses are defined as those expenses that are necessary to maintain
revenue and an asset's profitability.

The Bottom Line

Investors may find the P/B ratio to be a useful metric because it can provide a good way to
compare a company's market capitalization to its book value. But determining a standard and
an acceptable price-to-book ratio isn't always easy. As mentioned above, this varies by industry.
In some cases, a lower P/B ratio could mean the stock is undervalued, but it may also point to
fundamental problems with the company.

Net Operating Income (NOI)

NOI is generally used to analyze the real estate market and a building's ability to generate
income. Real estate property can generate revenues from rent, parking fees, servicing, and
maintenance fees. A property might have operating expenses of insurance, property
management fees, utility expenses, property taxes, janitorial fees, snow removal and other
outdoor maintenance costs, and supplies.

The rule of thumb is to categorize an expense as an operating expense if not spending money
on that cost would jeopardize the asset's ability to continue producing income. Income taxes
and interest do not impact the potential of a company or real estate investment to make money,
so they're not included in NOI.

The NOI equation is gross revenues less operating expenses equals net operating income. NOI
also determines a property's capitalization rate or rate of return. A property's capitalization is
calculated by dividing its annual NOI by its potential total sale price.

Earnings Before Interest and Taxes (EBIT)

EBIT is calculated by subtracting a company's cost of goods sold (COGS) and its operating
expenses from its revenue. EBIT can also be calculated as operating revenue and non-
operating income, less operating expenses.

Assume Company ABC generated $50 million in revenue, and it had COGS of $20 million,
depreciation expenses of $3 million, non-operating income of $1 million, and maintenance
expenses of $10 million during the last fiscal year. Its resulting EBIT was, therefore, $21 million.
Its EBIT equation is $50 million (revenue) plus $1 million less $10 million (maintenance
expenses) less $20 million (cost of goods sold) equals $21 million.

NOI vs. EBIT Example

Assume an investor purchases an apartment building in an all-cash deal. The property
generates $20 million dollars in rents and servicing fees. The apartment building has operating
expenses that amount to $5 million and depreciation expenses of $100,000 for its laundry
machines.