A company reports $100M EBITDA and $30M Net Income. Which number should you trust?
The answer: both, but they're measuring different things. EBITDA shows how much cash your operations generate. Net Income shows how much profit you actually keep after everything.
This guide explains what lives between those two numbers and when to use each metric.
The Formulas
EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization)
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Or equivalently:
EBITDA = Revenue - Cost of Goods Sold - Operating Expenses (excluding D&A)
Net Income (Bottom-Line Profit)
Net Income = Revenue - COGS - Operating Expenses - Interest - Taxes - Depreciation - Amortization - Other Losses
What EBITDA Measures: Operational Cash Flow
EBITDA strips out four things to get to a "pure" operating profit number:
1. Interest (I) – Cost of debt 2. Taxes (T) – Government taxes 3. Depreciation (D) – Accounting cost of assets wearing out 4. Amortization (A) – Accounting cost of intangible assets being used up
Why remove these?
Because companies have different capital structures and tax situations. Comparing profitability across:
- A company with lots of debt (high interest) vs. one with no debt
- A company in a low-tax country vs. a high-tax country
- A company with old equipment (high depreciation) vs. new equipment
- A company that bought competitors (high amortization) vs. one that grew organically
...becomes difficult if interest, taxes, and D&A distort the numbers.
EBITDA = how much cash the core business generates. Before capital costs, taxes, and accounting adjustments.
Real Example
Revenue: $200M
Cost of Goods Sold: -$80M
Operating Expenses: -$40M
EBITDA: $80M
Interest (debt payments): -$10M
Taxes: -$15M
Depreciation & Amortization: -$20M
Net Income: $35M
Your operations generated $80M in profit. But after interest, taxes, and depreciation, you only keep $35M.
What Net Income Measures: True Profit
Net Income is the bottom line. It's what's left after paying for everything:
- Cost of goods
- Operating expenses
- Debt servicing (interest)
- Taxes
- Asset wear (depreciation and amortization)
- One-time charges or gains
Net Income = money shareholders keep. (Or reinvest in the business, or use to pay dividends.)
Why Net Income Matters
Net Income is what investors actually care about. If a company reports $80M EBITDA but only $5M Net Income, something is very wrong:
- High debt burden (too much interest)
- Terrible tax situation
- Massive depreciation (capital-intensive)
- One-time losses
You can't spend EBITDA. You can only spend Net Income (and actual cash flow, which is different again).
The Gap: What's Hiding Between EBITDA and Net Income
The difference between EBITDA and Net Income reveals important things:
High EBITDA, Low Net Income = Capital Intensive Business
Example: Oil & Gas Company
- Revenue: $200B
- EBITDA: $60B
- Depreciation & Amortization: $30B (oil rigs, refineries wear out fast)
- Interest: $5B (financed the equipment)
- Taxes: $10B
- Net Income: $15B
Gap = $45B (EBITDA $60B - Net Income $15B)
Why? Massive assets (oil rigs, refineries) that depreciate heavily. EBITDA looks great, but real profit is much lower.
Lesson: Never buy a capital-intensive company based on EBITDA alone. Depreciation is real—it means you'll need to reinvest to keep the business running.
High EBITDA, Low Net Income = High Debt
Example: Leveraged Company
- Revenue: $100M
- EBITDA: $30M
- Depreciation & Amortization: $5M
- Interest (debt payments): $20M (lots of debt)
- Taxes: $2M
- Net Income: $3M
Gap = $27M (mostly from interest payments)
Why? The company took on too much debt. EBITDA is healthy, but interest payments drain profitability.
Lesson: A company with great EBITDA can still be overleveraged. Check interest coverage ratio (EBITDA ÷ Interest). Below 2x is risky.
High EBITDA, Low Net Income = One-Time Charges
Example: Tech Company with Acquisition Losses
- Revenue: $500M
- EBITDA: $150M
- Depreciation & Amortization: $20M (acquired companies)
- Interest: $2M
- Taxes: $30M
- One-time charges: $100M (acquisition write-offs, restructuring)
- Net Income: -$2M (loss)
Gap = $152M (mostly from one-time charges)
Why? The company acquired another company, wrote off goodwill, and took restructuring charges.
Lesson: When Net Income is far below EBITDA, dig into the footnotes. One-time items can distort profitability. Next year might look better (or worse).
When to Use EBITDA
Use EBITDA when you want to compare operational efficiency across companies.
Best Use Cases:
-
Comparing peer companies. Is Company A or Company B more operationally efficient? EBITDA removes capital structure differences.
-
Valuation by multiples. M&A professionals use EV/EBITDA multiples because EBITDA is capital-structure-neutral. A company with $50M EBITDA should sell for roughly the same multiple as another $50M EBITDA company, regardless of debt.
-
Pre-profitability startups. Startups with high growth but negative Net Income sometimes have positive EBITDA. It shows operational traction even if accounting rules or taxes make Net Income negative.
-
Capital-intensive industries. Oil, utilities, infrastructure, manufacturing. EBITDA is a proxy for "how much cash does the business generate before we have to reinvest?"
-
Dividend capacity. A company with $100M EBITDA and $30M depreciation might be able to pay a dividend from cash, even if Net Income is lower.
EBITDA Margin (EBITDA ÷ Revenue)
Industry benchmarks: | Industry | Typical EBITDA Margin | |----------|----------------------| | Software/SaaS | 25-40% | | Oil & Gas | 30-40% | | Telecom | 30-45% | | Retail | 10-15% | | Manufacturing | 15-25% |
High EBITDA margin = strong operational efficiency. Low EBITDA margin = cut costs or raise prices.
When to Use Net Income
Use Net Income when you care about actual profit and shareholder value.
Best Use Cases:
-
Assessing profitability. Is the company actually profitable, or is EBITDA misleading?
-
Calculating EPS (Earnings Per Share). Net Income ÷ Shares Outstanding = EPS, which is what stock valuations are based on.
-
P/E valuation. Stock price ÷ EPS. This is the most common stock valuation metric, and it relies on Net Income.
-
Sustainability. Can the company pay debts, taxes, and dividends? Net Income answers this. EBITDA doesn't.
-
Comparing to peer valuations. If Company A trades at 20x earnings and Company B at 12x earnings, that's based on Net Income, not EBITDA.
Net Margin (Net Income ÷ Revenue)
Industry benchmarks: | Industry | Typical Net Margin | |----------|-------------------| | Software/SaaS | 10-25% | | E-Commerce | 2-5% | | Oil & Gas | 5-15% | | Retail | 2-4% | | Manufacturing | 5-10% |
Higher net margin = more profitable. A 20% net margin is excellent. A 2% net margin is thin but okay for retail.
Real Company Examples
Meta (Tech Growth Company)
| Metric | Value | |--------|-------| | Revenue | $150B | | EBITDA | ~$76B | | Net Income | ~$46B | | Gap | $30B |
Why the gap? Stock-based compensation (~$20B), taxes (~$10B). Meta's operations are incredibly profitable (EBITDA margin 51%), and true profit is also strong (net margin 31%).
ExxonMobil (Capital Intensive)
| Metric | Value | |--------|-------| | Revenue | $340B | | EBITDA | ~$82B | | Net Income | ~$33B | | Gap | $49B |
Why the gap? Massive depreciation (~$40B) from oil rigs and refineries. Taxes and interest add another ~$9B. Operations are profitable (24% EBITDA margin) but real profit is lower (10% net margin) due to asset intensity.
Delta Air Lines (Leverage-Heavy)
| Metric | Value | |--------|-------| | Revenue | $57B | | EBITDA | ~$14B | | Net Income | ~$4B | | Gap | $10B |
Why the gap? High interest payments (debt-financed aircraft fleet), depreciation, and taxes. EBITDA margin looks okay (25%), but net margin is thin (7%) due to leverage.
Red Flags: When EBITDA Can Mislead
1. EBITDA-only companies that won't report Net Income If a company emphasizes EBITDA but downplays Net Income, investigate. There might be hidden charges or leverage issues.
2. Depreciation that's not replaceable A company might have low depreciation ($5M) but needs to spend $50M annually to replace equipment. EBITDA hides this capex requirement.
3. Acquisition-heavy companies Companies that grow by acquisition will have high amortization (from goodwill write-offs). EBITDA makes them look better than they are.
4. Highly leveraged companies If interest costs are huge (company took on debt), EBITDA will look great but Net Income will be sad.
The Right Approach: Use Both
Look at both metrics together:
| Metric | Tells You | |--------|-----------| | EBITDA margin > 30% | Strong operations | | Net margin > 15% | True profitability | | Both growing YoY | Healthy business | | EBITDA up, Net Income down | Something's wrong (leverage, depreciation, taxes) | | EBITDA low, Net Income lower | Struggling business |
The Checklist
When evaluating a company:
- ✓ Calculate both EBITDA and Net Income
- ✓ Compare margins to industry benchmarks
- ✓ Understand the gap (depreciation, interest, taxes, one-time items)
- ✓ Check if depreciation is reinvestment-heavy (oil rigs) vs. light (software)
- ✓ Assess leverage (is interest cost reasonable?)
- ✓ Look at trends (are margins improving or declining?)
The Bottom Line
EBITDA = How much profit operations generate (before financing, taxes, depreciation).
Net Income = How much profit actually belongs to shareholders.
EBITDA is a useful operational metric. It shows business quality independent of capital structure.
But Net Income is truth. It's what matters for valuation, dividends, and sustainability.
Use EBITDA to compare operations. Use Net Income to assess actual profit. And always understand what's hidden in the gap between them.