ETR is defined as which ratio?

ETR is defined as which ratio?

• A. Tax Expense Divided by PBT
• B. Tax Expense Divided by Revenue
• C. Tax Expense Divided by EBIT
• D. Tax Expense Divided by Net Income

Answer: (A)

ETR measures how much tax a company pays relative to its pre-tax profits. It is calculated as Tax Expense divided by Profit Before Tax (PBT). This denominator captures earnings before any tax, including both operating and financing results, so the ratio shows the true tax burden on pre-tax earnings. Using revenue as the base would mix tax with sales performance, not profitability. Dividing by EBIT would exclude the impact of interest income/expense, giving a distorted picture of the tax burden on pre-tax income. Dividing by net income would place tax relative to the bottom line, which isn’t what ETR aims to measure.

ETR measures how much tax a company pays relative to its pre-tax profits. It is calculated as Tax Expense divided by Profit Before Tax (PBT). This denominator captures earnings before any tax, including both operating and financing results, so the ratio shows the true tax burden on pre-tax earnings. Using revenue as the base would mix tax with sales performance, not profitability. Dividing by EBIT would exclude the impact of interest income/expense, giving a distorted picture of the tax burden on pre-tax income. Dividing by net income would place tax relative to the bottom line, which isn’t what ETR aims to measure.