The key difference between EBITDA and Net Income is that EBITDA refers to earnings of the business which is earned during the period without considering the interest expense, tax expense, depreciation expense and amortization expenses, whereas, Net Income refers to earnings of the business which is earned during the period after considering all the expenses incurred by the company.
Difference Between EBITDA and Net Income
Earnings before interest, taxes, depreciation, & amortization (EBITDA) is a method that is often used to find the profitability of companies and industries. It is very similar to net income with a few extra non-operating income additions. EBITDA is an indicator used for conducting comparative analysis for various companies.
It is one of the major financial tools used for evaluating firms with different sizes, structures, taxes, and depreciation.
- EBITDA = EBIT + Depreciation + Amortization or
- EBITDA = Net Profit + Taxes + Interest + Depreciation + Amortization
To simply put, depreciation is the reduction in the value of tangible assets over time that results in wear and tear of the tangible assets.
Amortization is the financial technique used to incrementally reduce the value of intangible assets of a company.
Net income is often used to find out the total earnings or profit of a company. It can be calculated by subtracting the cost of doing business for the company’s revenue.
- Net income = Revenue – Cost of doing business
Cost of doing business includes all the taxes, the interest that the company should pay, the depreciation of assets and other expenses. So, net income is a company’s income after taking all the deductions and taxes into account.
EBITDA is somewhat similar to net income as both of their values are subject to change because some of the elements involved in their calculation might be subjected to manipulation by the companies.
EBITDA vs Net Income Infographics
Key Differences Between EBITDA and Net Income
Here are the key differences between them.
- One of the key differences is the usage of depreciation and amortization. EBITDA is an indicator that calculates the profit of the company before paying the expenses, taxes, depreciation, and amortization. On the other hand, net income is an indicator that calculates the total earnings of the company after paying the expenses, taxes, depreciation, and amortization.
- EBITDA is used as an indicator to find out the total earning the potential of a company. On the other hand, net income is used to find out the earnings per share of the company.
- EBITDA can be measured by adding depreciation and amortization to EBIT or by adding interests, taxes, depreciation and amortization to net profit. Net income, on the other hand, is calculated by subtracting revenue from the overall cost of doing the business.
- With EBITDA is basically used for start-up companies to see how they are performing. Net income, on the other hand, is used pervasively in all circumstances to understand the financial health of a company.
- EBITDA is used to find out the earning potential of the company. That’s why when investors look at a new company, they calculate EBITDA. EBITDA is also pretty easy to use since there’s no depreciation and amortization involved. On the other hand, net income is used to find out the earnings per share if the company has issued any shares. Just by dividing the net income by the number of outstanding shares, we can get the EPS.
Comparative Table
|
Basis for Comparison |
EBITDA |
Net income |
|
Definition |
EBITDA is an indicator used for calculating a company’s profit-making ability. |
Net income is an indicator which is used to calculate company’s total earnings. |
|
Used |
To calculate the earning potential of the company. |
|
|
Calculation |
EBITDA = EBIT + Depreciation + Amortization Or EBITDA = Net Profit + Taxes + Interest + Depreciation + Amortization |
Net income = Revenue – Cost of doing business |
|
Result |
Calculation of income generated by the company without deducting any expenses like interest, tax, depreciation, and amortization. |
Calculation of total earnings of the company after reducing all the expenses. |
Conclusion
When we look at these terms, they are both indicators that can be adjusted by the companies. But still, the investors look into both of these indicators for making trading decisions so that they can get an idea about the big picture of the company.
Since these two are calculated by using the income statement, the investors should use other ratios as well to cross-check how a company is doing. One or two indicators can provide enough information, but to take the decision to invest in a company based on that isn’t prudent. That’s why investors should use ROIC, ROE, Net Profit Margin, Gross Profit Margin, etc.
Along with that they should also look at other financial statements like the balance sheet and the cash flow statement.
EBITDA vs Net Income Video
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This has been a guide to EBITDA vs Net Income. Here we discuss the top differences between net income and EBITDA along with infographics and comparison table. You may also have a look at the following articles –
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