Operating income and EBITDA are both ways to measure a company’s financial performance, but they have some key differences.
Operating income is how much a company makes from its core business activities after operating expenses have been taken into account. It’s compliant with the generally accepted accounting principles (GAAP), the accounting standards public companies in the U.S. must follow.
EBITDA, on the other hand, is how much a company makes before the effects of interest, taxes, depreciation, and amortization. It is not GAAP-compliant, but can be a good formula for comparing the financial health of two different companies in the same industry.
While many people wonder whether EBITDA is the same as operating income, the short answer is, no. While these two metrics are related, operating income adds back some of the expenses that EBITDA strips out. Here’s what you need to know about operating income vs. EBITDA, how they are similar and different, and why they are both important.
What Is Operating Income?
Operating income is the amount of profit a company earns from its operations, after deducting operating expenses such as wages, depreciation, and cost of goods sold (COGS). To calculate operating income, any expenses that revolve around the production of goods, or the execution of any services, are subtracted from operating revenue.
Of the three financial statements a business must produce (balance sheet, income statement, and cash flow statement), operating income appears on the income statement.
Analyzing operating income is helpful to investors because it doesn’t include taxes and other one-off items that might skew profits. Lenders may also look at operating income (from current and previous income statements) when a business owner applies for a small business loan. A company that shows an increasing amount of operating income is viewed as doing a good job of generating more revenue while controlling expenses, production costs, and overhead.
How Operating Income Is Calculated
This is the basic formula for calculating operating income:
Operating Income = Gross Income – Operating Expenses
Gross income is defined as the total amount a business earns minus the cost of goods sold (COGS).Operating expenses are expenses a business incurs through its normal business operations, including: selling, general, and administrative expenses; depreciation and amortization;and other operating expenses.
What does operating income not include?
Operating income does not take into account any money received or lost through non-core or non-operating business activities. This means the following data is not taken into account when calculating operating income:
• Real estate sales
• Investment income
• One-time transactions
• Stock market gains
• Interest income
• Interest on debt
• Taxes
• Lawsuit settlements
On its own, operating income is not a complete picture of a company’s financial health, but it is a very important facet. While a company may make a sizable amount of money from non-operating activities, most companies generate a majority of their revenue from their operating revenue. Because of this, operating income illustrates a majority of their cash flow.
What Is EBITDA?
EBITDA is earnings before taxes, interest, depreciation, and amortization. It’s not an official GAAP calculation because it removes the effects of all of those variables, which are real expenses. However, from an analyst’s or investor’s viewpoint, there are good reasons to not include them when understanding a business.
Let’s take a look at why.
Interest: This refers to interest on debt, including all types of business loans. The reason EBITDA excludes it is that 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. To better compare the relative performance of different companies, EBITDA adds interest paid on debt back to net income.
Taxes: Income tax varies from one location to another. Two companies with identical sales numbers could pay significantly different amounts depending on where they are located. Therefore, taxes do not illustrate a company’s financial performance or revenue potential. When comparing the performance of two different companies, it’s only logical to remove their tax burdens.
Depreciation & Amortization: Depreciation and amortization involve spreading out the cost of an asset over the course of its useful life. For many companies, depreciation and amortization are very real costs that cannot be avoided. However, EBITDA adds these non-cash expenses back to net income because they depend on the historical investments the company has made, not on its current operating performance. Plus, there are not always hard and fast rules about how to calculate depreciation and amortization, which means methods can vary from company to company.
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EBITDA vs Cash Flow
Is EBITDA the same as operating cash flow? Not exactly. When comparing cash flow vs. EBITDA, keep in mind that both track the cash flow generated by a business’s operations and ignore cash flow from investing or financing activities. However, EBITDA doesn’t factor in interest or taxes, whereas operating cash flow does, since they are cash expenses.
How EBITDA Is Calculated
EBITDA is calculated by adding certain expenses back to net income. To calculate it, the following data is required:
• Net income
• Interest expenses
• Taxes
• Depreciation costs
• Amortization costs
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Comparing EBITDA vs Operating Income
EBITDA and operating income have both similarities and differences. Here’s a look at how they stack up.
Similarities
• Both are a measure of a company’s profitability
• Neither consider the costs of interest and taxes
• Neither is indicative of a company’s overall financial health
Differences
• EBITDA adds depreciation and amortization back to net income: operating income subtracts them from operating revenue
• EBITDA includes gains or losses from non-operating income; operating income does not
Operating income suggests how much profit can be gained from operating revenue if operating expenses are lowered;
• EBITDA suggests a company’s income potential if certain variables like interest or taxes can be mitigated.
| Operating Income | EBITDA | |
|---|---|---|
| Gives you information about a company’s profitability | ✓ | ✓ |
| Indicative of a company’s overall financial health | X | X |
| Official GAAP measurement | ✓ | X |
| Includes income from primary business operations | ✓ | ✓ |
| Includes income from investments and asset sales | X | ✓ |
| Excludes interest and taxes | ✓ | ✓ |
| Excludes depreciation and amortization | X | ✓ |
How Operating Income and EBITDA Are Related
Both operating income and EBITDA measure a company’s profitability. EBITDA strips out some of the costs of doing business in order to more clearly show the profitability of a company’s core operations. Operating income adds some of those costs back in to show the company’s actual net profit.
EBITDA Formula
There are two formulas for EBITDA.
Option 1:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Option 2:
EBITDA = Operating income + Depreciation + Amortization
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How Operating Income Fits Into the Formula
Operating income is used in the second formula to calculate EBITDA (Operating income + Depreciation + Amortization). However, both formulas are doing the same thing — figuring out what the company’s earnings would be if taxes, interest, amortization, and depreciation were not taken into account.
Operating Income vs EBITDA Example
To understand how much EBITDA can change a company’s numbers, let’s take a look at Adobe. The following data was pulled from Adobe’s 2023 annual income statement.
(Note: All data listed is in U.S. thousands.)
| Total revenue | 19,409,000 | |
|---|---|---|
| Cost of revenue | 2,354,000 | |
| Gross income/profit | 17,055,000 | |
| Operating expense | 10,405,000 | |
| SG&A | 6,764,000 | |
| R&D | 3,473,000 | |
| Depreciation/Amortization | 168,000 | |
| Operating income | 6,650,000 | |
| Net non-operating interest income | 156,000 | |
| Non-operating interest income | 269,000 | |
| Non-operating interest expense | 113,000 | |
| Income before taxes | 6,799,000 | |
| Taxes | 1,371,000 | |
| Net income | 5,428,000 |
For 2023, Adobe reported an operating income of $6.65 billion. Let’s look at how they got that number:
Operating Income = Gross Income – Operating Expenses
According to their income statement, Adobe had a gross profit of $17.055 billion and total operating expenses of $10.405 billion. Putting those numbers into the formula, we get:
Operating Income = $17.055 billion – $10.405 billion = $6.650 billion
Unlike net income (which tells you a company’s total earnings or losses after accounting for all sources of income and all expenses), operating income tells you how much of a company’s total profit comes from its core business activities (or operations). As we can see with Adobe, operating income tends to be higher than net income ($6.650 billion vs. $5.428 billion)
Now, let’s look at Adobe’s 2023 EBITDA. Unlike operating income, EBITDA is not an official GAAP measurement, so companies are not required to disclose on their financial statements. However, you can calculate a firm’s EBITDA using the numbers on the income statement, like so:
EBITDA = Net Income + Interest + Taxes + Depreciation/Amortization
EBITDA = 5,428 billion + $113 million + 1.371 billion + 168 million
EBITDA = 6.08 billion
EBITDA offers a more positive look at Adobe’s profits for 2023 — roughly 6.1 billion compared to around 5.4 billion. This is typically the case since EBITDA includes non-operating income and adds back most expenses.
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Pros and Cons of Using Operating Income
| Pros of Operating Income | Cons of Operating Income |
|---|---|
| Provides a clear picture of how well a company is performing in its primary business activities. | Excludes important costs (like interest expenses and taxes) that can significantly impact a company’s overall profitability. |
| Can help investors and analysts evaluate the company’s operational efficiency and performance over time. | Can be affected by factors that are not directly related to a company’s core operations (such as changes in the cost of raw materials) |
| By focusing on the core operating activities, can be used to compare the profitability of companies within the same industry. | Does not consider a company’s capital structure or financing decisions, which can significantly impact its overall financial performance. |
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The Takeaway
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It can be useful when comparing the financial performance of two different companies because it removes the effects of any accounting or financing decisions that owner’s have discretion over.
Operating income is how much a company makes from its core business operations after any related expenses are taken into account. It adds back some (but not all) of the numbers that are excluded from EBITDA.
Looking at both operating income and EBITDA provides a more complete picture of a company’s financial performance and potential than either one alone.
When it comes to getting approved for a small business loan, lenders will often look at both of these metrics. EBITDA tells them whether your business is generating more cash flow than the amount of the loan payments. Growth in operating income indicates that your company is likely to continue to be profitable.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ<
How do you calculate operating income from EBITDA?
Operating income and EBITDA have two different formulas.
Operating income formula:
Operating Income = Gross Income – Operating Expenses
EBITDA Formula:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
OR
EBITDA = Operating Income + Depreciation + Amortization
Is operating income the same as EBITDA or the same as EBIT?
Operating income is similar to EBIT (earnings before interest and taxes), since it does not incorporate the cost of interest or taxes into its calculation. EBIT, however, includes non-operating income and non-operating expenses, while operating income does not. Operating income is solely focused on the net profit gained from operating expenses.
Is operating income or EBITDA better?
It depends on your purpose. For comparing two companies in the same industry, many analysts and investors prefer EBITDA because it removes variables that are unique and vary from business to business. Some analysts, however, prefer operating income over EBITDA because depreciation and amortization are still expenses that need to be accounted for.
Business owners may find operating income to be more useful than EBITDA, especially if they are looking for ways to lower overhead in order to increase profits without increasing sales.
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