EBITDA vs Net Income: Differences and Relationship
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What Is EBITDA?
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.
What Is Net Income?
How EBITDA and Net Income Are Related
Comparing EBITDA vs Net Income
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
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.
Pros and Cons of EBITDA
Pros and Cons of Net Income
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