Earnings before interest, taxes, depreciation, and amortization (EBITDA), and revenue are key metrics of profitability and health of a business. Both indicate financial performance, but the main difference is that revenue tells you how much the company sells in total, while EBITDA measures the profit the company generates from its operations and has available to make interest payments.
Both EBITDA and revenue are commonly used as enterprise value multiples.
That’s the simple explanation. If you want to dive deeper, keep reading:
What is EBITDA
EBITDA stands for Earnings before interest, taxes, depreciation, and amortization. It is also called operational income.
It is a profitability measure, similar to net income or EBT (earnings before taxes).
EBITDA is not a metric recognized under GAAP. This is a downside of using it, as different companies have different ways of measuring it.
How to Calculate EBITDA
To get to EBITDA, you can use the company’s income statement, balance sheet, and cash flow statement. The formula is as follows:
EBITDA = Net Income + Interest + Taxes + Depreciation/Amortization
You’re basically adding back these expenses to the net income to get the desired result.
The goal is to estimate the cash profit of the business from sales and operations alone.
Interest and taxes are dependent on the capital structure of the company. They have nothing to do with its daily operations and business model.
Depreciation and amortization are non-cash expenses. They don’t represent actual cash leaving the company.
Even if a company doesn’t report EBITDA, you can easily calculate it from the financial statements.
What Does EBITDA Tell You
Some investors like EBITDA because it only measures the operational performance and profitability of the firm. They may use an EBITDA multiple to determine the value of a company and compare it to others in the same industry.
Capital structure (how much debt and equity the company uses to finance its assets) can be restructured later.
Meanwhile, EBITDA looks at the underlying business of buying supplies or services and creating a product, marketing it, getting the public’s interest, and figuring out the logistics of satisfying all the demand. Is that going well? How profitable is it?
Knowing this, a positive EBITDA means the business model works, although it ignores how it is financed, as that can always be restructured.
It’s important to not focus solely on EBITDA when evaluating a business. A company in excessive debt would like you to focus solely on it. Why? Because it ignores the rising interest payments.
A company that recently spent a lot on assets (capital expenditures) would like you to focus on EBITDA as well. Capital expenditures only appear as an expense in the income statement, through a higher cost in depreciation—which EBITDA excludes.
The truth is how the business finances its operations is important as well.
What is Revenue
Revenue is all the money brought into the business by its business activities.
It represents all sales activity and is the first line in the income statement. This is why you may have heard people call it the “top line.”
It is not the same as the cash brought into the company, though.
It includes sales made on credit and for which the product is delivered to the customer, although they have not transferred the money to cover the payment.
It’s a simple metric, meaning it doesn’t result from any subtractions. In other words, it doesn’t take into account how much the company spends to make money.
For example, gross profit (also called gross income) is calculated by subtracting the cost of goods sold from revenue. This evaluates how efficient the company is at using its labor and supplies (variable costs) to produce and sell its product.
How is Revenue Calculated
Revenue is given by the following formula:
Revenue = Quantity Sold x Price of the Product
This is the most basic calculation of revenue. However, most times you will need to deduct price discounts, allowances granted to customers, and/or product returns to this number. In this case, you can also call it net sales.
For a service company, instead of the number of goods sold multiplied by the sales price, revenue is the number of service hours multiplied by the charged service rate.
Most businesses sell different products at different prices, in which case the revenue formula above is calculated for each product and then added together to get the company’s total revenue.
What Does Revenue Tell You
Revenue is all the money a company earns through the sale of its products or services to customers.
After getting this number, all the costs are subtracted from revenue to calculate net income or the bottom line. For example, the cost of goods sold (COGS) represents the direct costs of making the product. It includes both direct labor costs, and any costs of materials used in manufacturing the company’s products.
Revenue can be divided into operating revenue—sales from the company’s core business—and non-operating revenue which is derived from secondary sources such as a sale of an asset.
Net income growth while revenues remain stagnant means a reduction in costs.
Now, what about EBITDA vs revenue? Here’s the difference:
What’s the Difference Between EBITDA and Revenue
The difference between revenue and EBITDA can be summarized as this:
|Net income plus interest, taxes, depreciation, and amortization
|Price of products times quantity sold
|Measure operational profitability
|Measure all sales activity
How to Calculate EBITDA from Revenue
To calculate the EBITDA starting from revenue, you must subtract all operating expenses. These are all the expenses a company incurs through its normal business operations. They include:
- COGS: Cost of goods sold. These are variable costs, as they increase in proportion to how much product the company sells. For example, raw materials, commissions, and shipping costs.
- SG&A: Selling, general and administrative costs. These are fixed costs, as they are expenses that don’t change as a result of an increase or decrease in the number of goods and services produced or sold. For example, rent, utilities, marketing, and salaries.
- Other operating expenses, which are not included in non-operating expenses such as interest expenses, income tax, or depreciation/amortization.
By contrast, a non-operating expense is unrelated to the business’s core operations. The most common types of non-operating expenses are interest payments on loans and losses from selling assets.
Here’s an example of an income statement that illustrates this:
|Revenue, or “Top Line”
|Cost of Goods Sold
|(= Gross Profit)
|Other Operating Expenses
|Depreciation and Amortization
|(= EBIT, or Operating Profit)
|(= EBT, or Pre-Tax Income)
|(= Net Income, or “Bottom Line”)
Knowing this, an alternative formula to the one above to calculate EBITDA is:
EBITDA = Revenue – COGS – SG&A – Other Operating Expenses
This is more intuitive. The problem is companies may have different ways of reporting expenses. The formula above levels the playing field by starting at the bottom line (net income) and adding back non-operating expenses.
EBITDA vs. Revenue FAQs
Is EBITDA the same as revenue?
No. EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It’s a financial performance measure that tells you how much profit the business generates from its daily operating activities. On the other hand, revenue is the gross amount of money the business generates from selling its product.
Is EBITDA higher than revenue?
No. EBITDA is revenue minus the direct operational costs the business incurred to generate that revenue, so it can’t be higher. In other words, EBITDA is the revenue left after some expenses have been subtracted.
How is EBITDA calculated from revenue?
To calculate EBITDA from revenue, subtract operational expenses like COGS and SG&A from revenue. The goal of EBITDA is too exclude the effect of non-operational expenses such as interest payments and corporate taxes.