EBITDA vs Net Income

Earnings before interest, taxes, depreciation, & amortization (EBITDA) 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.

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.

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, 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 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 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 values are subject to change because the companies might manipulate some of the elements involved in their calculation.

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.

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 circumstances 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 of outstanding shares, we can get the EPS.

The comparative table shall give us a head-to-head view of both these concepts and their differences.

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 statement, 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 ROIC, ROE, Net Profit Margin, Gross Profit Margin, etc.

They should also look at other financial statements like the balance sheet and the cash flow statement to be able to assess the adjusted EBITDA vs net income of a company.

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