EBITDA vs Operating Income

Publication Date :

16 Jul, 2018

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EBITDA vs Operating Income Differences

EBITDA vs. Operating Income - Earnings before interest, tax, depreciation, & amortization (EBITDA) 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. Or
EBITDA = Net profit + Interest + Taxes + Depreciation + Amortization

Depreciation is the reduction in the value of tangible assets 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 company.

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 expenses
Gross income = Net Sales – Cost of goods sold

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 Differences

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 income.

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 Sales - 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 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.

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.