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EBITDA vs Net Income: Differences and Relationship

EBITDA vs Net Income: Differences and Relationship
Mike Zaccardi
Mike ZaccardiUpdated September 30, 2022
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Net income and EBITDA (earnings before interest, taxes, depreciation, and amortization) are both measures of business earnings. However, they are not the same thing.  Net income refers to earnings of a business during a certain period after subtracting all expenses incurred by the company. EBITDA is similar, but doesn’t subtract certain expenses (such as interest paid on debt and non-cash depreciation expenses) from total revenues. As a result, EBITDA will be higher than net income.If you own your own small business, it can be a good idea to know both metrics, since each convey different messages about your firm’s profitability. Lenders may also review both numbers if you apply for a small business loanHere’s a closer look at net income vs EBITDA, how these earnings measures are similar and different, and what each can tell you about your firm’s financial health.

What Is EBITDA? 

Is EBITDA the same thing as net income? Not exactly. EBITDA stands for earnings before taxes, interest, depreciation, and amortization. It’s a measure of a company’s earnings that factors in the cost of goods sold (COGS), general and administrative expenses, and other operating expenses. However, EBITDA doesn’t subtract costs that are not directly related to the company’s operations, namely interest paid on debt, amortization/depreciation expenses, and income taxes on business revenueAs a result, EBITDA can be useful for assessing a company’s income potential, as well as comparing the relative performance of two firms in the same industry that may have different tax liabilities and capital structures.Here’s a deeper look at what EBITDA excludes and why.
  • Interest: This refers to interest on debt, including all types of business loans. EBITDA excludes it because how much debt a company takes on will depend on the financing structure of a company. Different companies have different capital structures and, as a result, different interest expenses.
  • Taxes: Two companies with identical sales numbers could pay significantly different small business taxes, depending on where they are located and how many deductions they have. Therefore, taxes do not illustrate a company’s financial performance or revenue potential. 
  • Depreciation & Amortization: Depreciation and amortization involve spreading out the cost of an asset over the course of its useful life. While depreciation and amortization are real costs, they depend on the firm’s historical investments, not its current operating performance. 
Recommended: EBITDA vs Revenue 

What Is Net Income? 

Net income is simply the revenue a business brings in once all costs related to operating the business are subtracted. Those costs include COGS, general and administrative expenses, taxes, interest expenses, non-cash charges, among others. To calculate net income, you take the gross income — the total amount of money earned — for an accounting period, then subtract all expenses incurred by the business during that period.Net income is found at the bottom of a company’s income statement, which is why it’s often referred to as a company’s “bottom line.” 

How EBITDA and Net Income Are Related 

Many of the factors that impact EBITDA also impact net income. For example, both metrics start with a firm’s total revenues. And, both subtract business expenses (including COGS and selling, general, and administrative expenses) to determine a firm’s profits.To calculate EBITDA, analysts will typically start with net income then add back interest, taxes, depreciation, and amortization to arrive at EBITDA. 

Comparing EBITDA vs Net Income

Let’s dig into some of the key similarities and differences in EBITDA vs. net income. While the nuances might seem minor, they can add up to a significant difference in terms of final numbers. 

Similarities

There are several similarities between EBITDA and net income. Both metrics:
  • Are used to measure the earnings and profitability of a company
  • Take most of the major costs of doing business into account
  • Are used by investors and lenders to gauge the financial health and income potential of a business 

Differences  

There are also some key differences between EBITDA and net income. These include:
  • Net income subtracts taxes, interest paid on debt, and amortization/depreciation expenses from total revenues; EBITDA does not.
  • EBITDA is used to determine the total earning potential of a company, whereas net income is used to determine the company’s earnings after all expenses are paid.
  • Net income is often used to understand the financial health of mature companies, while EBITDA is commonly used to evaluate start-ups.
  • Net income is accepted by the generally accepted accounting principles (GAAP), whereas EBITDA is not. 
  • EBITDA is generally more useful than net income to compare the financial health of companies in the same industry.
  • EBITDA can overstate the earnings of a business by omitting real expenses, whereas net income cannot.
Recommended: Operating Income and EBITDA 

Pros and Cons of EBITDA

Pros and Cons of Net Income

The Takeaway

When comparing EBITDA vs. net income, it helps to understand that these are two different measures of a company's profitability. Net income refers to the amount a business makes after all costs. EBITDA adds certain costs (namely, interest paid on debt, taxes, and amortization/depreciation expenses) back to net income to provide better insight into a company’s operational efficiency and profit-making potential.If you’re in the market for a small business loan, a lender may look at either or both of these earnings metrics to see whether you have enough positive cash flow to comfortably make payments on the loan. 

3 Small Business Loan Tips

  1. Generally, it can be easier for entrepreneurs starting out to qualify for a loan from an online lender than from a traditional lender. Lantern by SoFi’s single application makes it easy to find and compare small business loan offers from multiple lenders.
  2. If you need to borrow money to cover seasonal cash flow fluctuations, a business line of credit, rather than a term loan, provides the flexibility you likely need.
  3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.

Photo credit: iStock/mapodile

Frequently Asked Questions

Are EBITDA and net income the same things?
Can net income be higher than EBITDA?
How is EBITDA converted to net income?

About the Author

Mike Zaccardi

Mike Zaccardi

Mike Zaccardi, CFA, CMT, is a finance expert and writer specializing in investments, markets, personal finance, and retirement planning. He enjoys putting a narrative to complex financial data and concepts; analyzing stock market sectors, ETFs, economic data, and broad market conditions; and producing snackable content for various audiences.
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