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 company’s profitability. EBITDA is an indicator used for giving a comparative analysis of various companies. It is a critical financial tool for evaluating firms with different sizes, structures, taxes, and depreciation.

  • EBITDA = EBIT + Depreciation + Amortization. OrEBITDA = 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 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 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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Operating income is often used to determine how much of the company’s revenue can be converted into profit. Operating income is a term used to calculate the amount of profit gained by a company’s operations. It can be computed by deducting overall expenses from gross income.

  • Operating income = Gross income – Operating expensesGross 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.
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Operating Income vs. EBITDA is slightly different from 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.

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 company’s profit after paying the operating expenses. It doesn’t include interest and taxes.EBITDA is used to determine the total earning potential of a company. Operating income reveals the company’s revenue that can be converted into profit.EBITDA is not an official measure under GAAP. Hence companies use this to project the company’s earning capacity to a maximum level. Whereas operating income is an official measure under GAAP, and the companies can’t make any adjustments to 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. On the other hand, operating income is the income that is considered 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. On the other hand, operating income 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.

Final Thoughts

EBITDA vs. Operating Income indicators are used to find the company’s profit-making ability. EBITDA looks for income-generating the capacity of the company. Operating income looks out for the income that can be changed into profit.

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.

An investor needs to consider Operating Income vs. EBITDA while making a decision. However, only these two indicators aren’t enough to make a sound judgment about a company’s financial health. You also need to look at other ratios 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

This article has guided the top differences between EBITDA and Operating Income. Here we also discuss the Operating Income and EBITDA key differences with infographics and a comparison table. You may also have a look at the following articles –

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