EBITDA vs Operating Income Differences
EBITDA vs. Operating Income – Earnings before interest, tax, depreciation, & amortization (EBITDA)(EBITDA)EBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors.read more are often used to find the profitability of the company. EBITDA is an indicator used for giving comparative analysis for various companies. It is one of the critical financial tools used for evaluating firms with different sizes, structures, taxes, and depreciation.
- EBITDA = EBIT + Depreciation + Amortization. Or
- EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization
DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more is the reduction in the value of tangible assetsTangible AssetsAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more over time due to usage, which 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 companyIntangible Assets Of A CompanyIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more.
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Source: EBITDA vs Operating Income (wallstreetmojo.com)
Operating income is often used to find out how much of the revenue of the company can be converted into profit. Operating income is a term that is used to calculate the amount of profit gained by the operations of a company. It can be computed by deducting overall expenses from gross income.
- Operating income = Gross income – Operating expenses
- Gross income = Net Sales – Cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more
Operating Income vs. EBITDA is slightly different than each other. Yes, Operating Income vs. EBITDA indicates the profit made by the company. EBITDA shows the profit, including interest, tax, depreciation, and amortization. But operating income tells the profit after taking out the operating expenses like depreciation and amortization.
EBITDA vs. Operating Income Infographics
Here are the top 5 differences to understand it better.
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Source: EBITDA vs Operating Income (wallstreetmojo.com)
EBITDA vs. Operating Income Key Differences
Here are the key differences between them.
- The first difference between operating income vs. EBITDA is the usage of interest and taxes. EBITDA is an indicator that calculates the income of the company before paying the expenses, taxes, depreciation, and amortization. On the other hand, operating income is an indicator that calculates the profit of the company after paying the operating expenses. It doesn’t include interest and taxes.
- EBITDA is used to find out the total earning the potential of a company. Operating income finds out the revenue generated by the company that can be converted into profit.
- EBITDA is not an official measure under GAAP. Hence companies use this to project the earning capacity of the company to a maximum level. Whereas operating income is an official measure under GAAP, and the companies can’t make any adjustments in it.
- EBITDA is popular because it can be used in companies of different sizes, structures, taxes, and interests. EBITDA can also be used to analyze and compare companies. Operating income, on the other hand, is the income that is considered as the income from operations. The primary difference between the operating income and the net income is the element of income from other sources.
- EBITDA can be measured by adding depreciation and amortization to EBIT. It can also be calculated by adding interests, taxes, depreciation, and amortization to net profit. Operating income, on the other hand, is calculated by subtracting operating expenses from the gross incomeGross IncomeThe difference between revenue and cost of goods sold is gross income, which is a profit margin made by a corporation from its operating activities. It is the amount of money an entity makes before paying non-operating expenses like interest, rent, and electricity.read more.
So, what are the main difference between EBITDA and Operating Income?
EBITDA vs. Operating Income Head to Head Differences
Let’s have a look at the head to head differences.
|
Basis for comparison |
EBITDA |
Operating income |
|
Definition |
EBITDA is an indicator used for calculating the profit-making ability of the company. |
Operating income is an indicator that is used to ascertain the amount of profit generated by the company’s operating activities. |
|
Used |
To calculate the earning potential of an organization. |
To ascertain how much revenue can be transmuted into profit. |
|
Calculation |
EBITDA = EBIT + Depreciation + Amortization. Or EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization |
Operating income = Net SalesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales.read more – Cost of Goods Sold – Operating Expenses |
|
Recognition |
EBITDA is not an official GAAP measure. |
Operating income is an official GAAP measure. |
|
Adjustments |
Adjustments are made in elements like depreciation and amortization by the company, which is part of EBITDA. |
Not, as such. |
Final Thoughts
EBITDA vs. Operating Income indicators are used to find the profit-making ability of the company. EBITDA looks for income-generating the capacity of the company. Operating income looks out for the income that can be changed into profit.
As an investor, you need to consider Operating Income vs. EBITDA while making a decision. However, only these two indicators aren’t enough to make a sound judgment about the financial health of a company. You need to look at other ratios also to understand how the company is run. Looking at all other ratios will help you understand the holistic view of the company so that you can make a prudent decision about the investment.
EBITDA vs. Operating Income Video
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