EBITDA vs Net Income

EBITDA vs Net Income Differences

EBITDA vs 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

Here are the top 4 differences between Net Income vs EBITDA

 

Net Income vs EBITDA Key Differences

Here are the key differences between them.

• One of the key differences between net income vs EBITDA is the usage of depreciation and amortization. EBITDA is an indicator which calculates the profit of the company before paying the expenses, taxes, depreciation, and amortization. On the other hand, net income is an indicator which 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 net income vs EBITDA 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.

EBITDA vs Net Income Head to Head Differences

Let’s have a look at the head to head differences.

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.	To calculate earnings per share (EPS).
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 EBITDA vs net income terms, they are both indicators that can be adjusted by the companies. But still, the investors look into net income vs EBITDA 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 net income vs EBITDA also should 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 a been a guide to the top differences between EBITDA vs Net Income. Here we also discuss the Net Income vs EBITDA key differences with infographics, and comparison table. You may also have a look at the following articles –

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