EBIT Before of After End of Year

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Earnings Before Interest and Tax > Best Practices

Alpesh suvagia, Student (MBA), India
When do we earn more: if we declare dividend before finishing of year or if we declare it after at the end of the year? (...) Read more? Sign up for free

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  Jaap de Jonge, Editor, Netherlands

Declaring or Paying Out Dividends do not Impact Profit and EBIT

A dividend is a distribution to shareholders of retained earnings that a company has already created through its activities.
A dividend is not an expense. So it does not reduce a company's profits. Nor does it affect EBIT. Because a dividend has no impact on profits, it does not appear on the income statement. Instead, it initially appears as a liability on the balance sheet, when the board of directors declares a dividend. Next, after the company pays the dividend, it still only has an impact on the balance sheet, as the amount in the retained earnings line item is reduced as well as the amount of cash (assuming that the dividend is paid in cash).
Note that dividends from investments in 3rd parties ARE having an effect on EBIT.

One way in which a dividend might reduce profits in the long term is from the perspective of future profits - paying out large dividends might starve a company of the cash that it needs to invest in innovation / R&D / future growth. But this is only so if the profits from the future growth would exceed the company's cost of capital. In other cases, where a company simply has excess cash for which it has no attractive use, paying out that cash as dividends will not have any impact on profit and EBIT, and not even on its future profit potential.

One other way in which dividends may have a minor impact on profits is that the cash could otherwise have been invested to generate interest income. Where cash is paid out to investors in the form of a dividend, the opportunity to generate such interest income is lost.

All in all, the basic answer to your question is: it doesn't matter, none of the 2 actions influence profit / EBIT.

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