Article byWallstreetmojo Team
Edited byAnkush Jain Ankush, seasoned finance enthusiast and content creator for 7+ years, is a TEDx and Josh Talks speaker, playwright, and music creator. With a commerce background, he simplifies complex concepts in insurance, personal investing, stock market, budgeting, risk management, logistics legalities, and real estate financing. As a former chief editor of an autobiography, Ankush continues to weave compelling narratives in both finance and beyond.
Reviewed byDheeraj Vaidya, CFA, FRM Dheeraj Vaidya, CFA, FRM is Co-Founder of Wallstreetmojo.com and possesses 18+ years of expertise in Financial Modeling, Valuations, and Excel. With a background as a former Equity Research Analyst at JPMorgan and CLSA, he brings unparalleled proficiency to these key financial domains.
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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Source: EBITDA vs Net Income (wallstreetmojo.com)
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.
Table of contents
- Difference Between EBITDA and Net Income
- Infographics
- Key Differences
- Comparative Table
- Why Use?
- EBITDA vs Net Income Video
- Recommended Articles
EBITDA Vs Net Income Explained
It is one of the major financial tools for evaluating firms with different sizes, structures, taxes, and depreciation.
- EBITDA = EBIT + Depreciation + Amortization or
- EBITDA = 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.
Infographics
Let us understand the differences between adjusted EBITDA vs net income with the help of the infographics below. The visual representation shall help us understand the differences with ease and help us have a deeper understanding of the concept.
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Source: EBITDA vs Net Income (wallstreetmojo.com)
Key Differences
Now that we know the basics of both concepts and its intricacies, let us discuss the key differences of both these concepts through the points below.
- One of the key differences in 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 determine the total earning potential of a company. On the other hand, net income is used to determine the company’s earnings per share.
- 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.
- EBITDA is used for start-up companies to see how they perform. On the other hand, net income is used pervasively in all circ*mstances to understand financial health.
- EBITDA is used to find out the earning potential of the company. That’s why investors calculate EBITDA when they look at a new company. EBITDA is also pretty easy to use since no depreciation and amortization are involved. On the other hand, net income is used to find out the earnings per share if the company has issued any shares. By dividing the net income by the number ofoutstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more, we can get the EPS.
Comparative Table
The comparative table shall give us a head-to-head view of both these concepts and their 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 that is used to calculate a 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. |
Why Use?
When we look at these terms, they are both indicators that the companies can adjust. But still, investors look into both of these indicators for trading decisions to get an idea about the company’s big picture.
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 deciding to invest in a company based on that isn’t prudent. Investors should use ROICROICReturn on Invested Capital (ROIC) is a profitability ratiothat 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 to be able to assess the adjusted EBITDA vs net income of a company.
EBITDA vs Net Income Video
Recommended Articles
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 –
- Differences Between Operating Income vs Net Income
- EBITDA vs Operating Income | Compare
- EBIT vs Net Income Differences
- NOPAT vs Net Income
