Difference Between EBITDA and Net Income

Earnings before interest, taxes, 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 The key difference between EBITDA and Net Income is that EBITDA refers to the business’s earnings earned during the period without considering the interest, tax, depreciation, and amortization expenses. In contrast, Net Income refers to the business’s earnings which are earned during the period after considering all the expenses incurred by the company.

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It is one of the major financial tools for evaluating firms with different sizes, structures, taxes, and depreciation.

  • EBITDA = EBIT + Depreciation + Amortization orEBITDA = Net Profit + Taxes + Interest + Depreciation + Amortization

Simply put, 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 AssetsTangible assets are assets with significant value and are available in physical form. It means any asset that can be touched and felt could be labeled a tangible one with a long-term valuation.read more over time that results in wear and tear of the tangible assets.

AmortizationAmortizationAmortization of Intangible Assets refers to the method by which the cost of the company’s various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset.read more is the financial technique used to incrementally reduce the value of a company’s intangible assets.

Net income is often used to determine a company’s total earnings or profit. It can be calculated by subtracting the cost of doing business from the company’s revenue.

  • Net income = Revenue – Cost of doing business

The cost of doing business includes all the taxes, the interest that the company should pay, the depreciation of assets and other expensesOther ExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more. 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 values are subject to change because the companies might manipulate some of the elements involved in their calculation.

EBITDA vs Net Income Infographics

Key Differences Between EBITDA and Net Income

Here are the key differences between them.

Comparative Table

Conclusion

When we look at these terms, they are both indicators that the companies can adjust. But still, the investors look into both of these indicators for trading decisions to get an idea about the company’s big picture.

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.

Since these two are calculated by using the income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more, the investors should also use other ratios to cross-check how a company is doing. One or two indicators can provide enough information, but to decide to invest in a company based on that isn’t prudent. Investors should use ROICROICReturn on Invested Capital (ROIC) is a profitability ratio that shows how a company uses its invested capital, such as equity and debt, to generate profit. The reason this ratio is so crucial for investors before making an investment is that it helps them decide which firm to invest in.read more, ROEROEReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit.read more, Net Profit MarginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization’s overall profitability after incurring its interest and tax expenses.read more, Gross Profit MarginGross Profit MarginGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold.read more, etc.

They should also look at other financial statements like the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more and the cash flow statement.

EBITDA vs Net Income Video

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 a comparison table. You may also have a look at the following articles –

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