The main difference between EBITDA and Operating Income is that EBITDA measures a company’s profitability and helps to determine a business’ earning potential while operating income measures a company’s profit after subtracting operating expenses including outgoing general and administrative costs.
Both Operating income and EBITDA are important accounting measures which help to derive the financial performance of organizations. Although Operating Income and EBITDA indicate the profit made by the company, EBITDA shows the profit including interest, tax, depreciation, and amortization, while operating income shows the profit after taking out the operating expenses like depreciation and amortization.
1. Overview and Key Difference
2. What is EBITDA
3. What is Operating Income
4. Relationship Between EBITDA and Operating Income
5. Side by Side Comparison – EBITDA vs Operating Income in Tabular Form
What is EBITDA?
EBITDA stands for Earnings Before Interests, Tax, Depreciation and Amortization. It is an accounting measure calculated using organizations’ net earnings, before the subtraction of interest expenses, tax, depreciation and amortization. Thus, it can be defined as a company’s operating profitability or a company’s operating performance.
EBITDA is often shown in the income statement, but it is not a generally accepted accounting principle (GAAP). However, it is widely used in many areas of finance when assessing the performance of a company, such as securities analysis. It is possible to use EBITDA as an indicator to compare profitability between different companies.
Having a negative value for EBITDA indicates that the business has problems with profitability and cash flow. However, a positive EBITDA does not fully mean that the business is profitable or generates cash.
Financial analysts commonly use EBIDTA to focus on the outcome of operating decisions while removing the impacts of non-operating decisions. Some of these decisions include interest expenses, which is a financing decision, tax rates, which is a governmental decision, or large non-cash items like depreciation and amortization, which is an accounting decision. Minimalizing the non-operating effects that are exclusive to each company helps investors to focus on operating profitability as a singular measure of performance.
Formula to Calculate EBITDA
EBIDTA = Net income + Interest + Tax + Depreciation + Amortization
What is Operating Income?
Operating income measures the amount of profit gained from a business’s operations, after removing operating expenses such as depreciation, wages, and cost of goods sold (COGS). Operating income takes a company’s gross income, which is equal to total revenue minus COGS, and subtracts all operating expenses. A business’s operating expenses are costs that incur from normal operating activities and include items such as office supplies and utilities.
More importantly, operating income is an indirect measure of efficiency; the higher the operating income, the more profitable a company’s core business is.
Several factors that can affect operating income of a business. These include pricing strategy, prices for raw materials, or labour costs. These factors also directly relate to the day-to-day decisions that managers make.
Formula of Operating Income
Operating income = Total Revenue – Direct Costs – Indirect Costs
Operating income offers financial analysts useful information for evaluating a company’s operating performance and help them to analyze operating profitability as a singular measure of performance. This kind of analysis is especially important when comparing similar companies across a single industry, particularly when these companies may have different capital structures or tax environments.
What is the Relationship Between EBITDA and Operating Income?
- Both Operating income and EBITDA are important accounting measures which help to derive the financial performance of organizations.
- These measures help to compare the performance of different companies in similar industries.
What is the Difference Between EBITDA and Operating Income?
EBITDA is often used to find the profitability of the company, whereas the operating income is used to calculate how much revenue of the company can be converted into profit. EBITDA shows the profit, including interest, tax, depreciation, and amortization, while operating income shows the profit after taking out operating expenses like depreciation and amortization. So, this is the key difference between EBITDA and operating income.
Practically, the difference between EBITDA and operating income may be best understood by studying real income statement data.
Summary – EBITDA Vs Operating Income
The key difference between EBITDA and operating income is that EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company’s profitability whereas operating income measures a company’s profit after subtracting operating expenses including outgoing general and administrative costs.
1. “Earnings Before Interest, Taxes, Depreciation and Amortization Definition.” Investopedia, Available here.
2. “Operating Income.” Investing Answers, Available here.
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