EBITDA vs. Revenue: Differences and Calculations
BL
Summary:
When looking at the financial health and investment prospects of a company, one must obviously take into account how much revenue the company is generating. However, in order to get a complete picture of a company’s financial health, EBITDA is crucial. EBITDA is a different way of calculating a company’s financial health than revenue, by factoring in different elements that are fundamental to the way businesses are structured.
You’ve probably heard a salesperson talk about how much a company is bringing in and why you should invest in said company. For instance, they might say something like, “Company X is bringing in X amount of revenue a month, and we hope to double it soon.” However, this does not examine how the company looks under the hood. Sure, lots of revenue is great, but what if there are also operating expenses that need to be paid? What if there is debt that needs to be serviced from an initial investment? What if the company has a lot of complex and expensive assets?
EBITDA and revenue are ways that you can look at a business and calculate its financial health. In the case of revenue, it’s pretty simple — it’s the money that a company brings into the bank account from selling its goods and services. With EBITDA, you can take a much more nuanced approach than simply the money brought in.
Compare Business Loans
Compare rates, terms, and community reviews between multiple lenders.
Revenue
Revenue is pretty easy to define. It is simply the amount of money brought into a company for selling its goods and services.
Every business will have some kind of revenue associated with them. If you sign a contract with a client to sell them $100,000 worth of goods or services, then that’s $100,000 of income for the company.
Revenue vs. net revenue
Net revenue, also referred to as net income, looks at more than just the revenue being brought in. This metric analyzes a company’s income statement by looking at its operating expenses, cost of goods sold, tax liability, and interest on the debt.
Obviously, all businesses operate differently, with some having larger or smaller profit margins based on their capital expenditures. If you’re struggling to cover the operating expenses of your business, a business loan may be helpful. Be sure to review and compare business loan lenders to get the best deal on this additional income.
What is included in an income statement?
When looking at an average income statement, one will look at the following items to determine the company’s net income.
- Top line revenue. This refers to literally the top line of the income statement. Revenue is the amount of money earned by a company for selling its goods and services. This is also referred to as the “top line,” or the money earned from sales.
- Costs of goods and services. The cost of goods and services, or COGS, is the amount of money spent on the goods or services before the company sells them. For instance, a company makes hamburgers that they sell for $3. It costs them $2 for the bun, meat, and condiments. This $2 represents the cost of goods and services.
- Operating expenses. Operating expenses are the outgoing fees and expenses needed to run a business. When calculating operating income, you deduct operating expenses such as rent or staff salaries.
- Interest payments. When companies either start or are operational, they will often use debt to fuel their initial capital expenses, as well as growth down the line. Every month or year, they will need to make interest payments on the debt. This interest expense is included in the operating cash flow of the company.
- Tax payments. Every place in the world has some sort of tax expense based on jurisdiction. This is also crucial when looking at the operational cash flow of a business. They might have to pay some sort of tax on the revenue generated.
IMPORTANT! You may see a lot of these costs included in a company’s cash flow statement as well, which analyzes the inflows and outflows of cash in a business.
Net revenue example
Let’s take a look at the cash flow and net revenue of an orange exporter in the same industry.
| Company A Net Revenue | |
|---|---|
| Oranges Sold | $100,000 |
| Revenue (Top Line) | $100,000 |
| COGS | $30,000 |
| Operating Expenses | $20,000 |
| Debt Interest Payments | $10,000 |
| Tax Payment | $5,000 |
| Net Revenue | $35,000 |
You can see here that the revenue is fixed at $100,000. However, there are other elements that the orange exporter needs to pay to operate his business. It costs about $30,000 to grow the oranges and transport them to the desired destination. The company pays another $20,000 for staff salaries and their office’s rent.
Furthermore, the company took out some debt to pay for some improvements to their orange production. This means they have to pay interest on the debt of $10,000 a year. Finally, the company needs to pay a tax of $5,000 a year to do business in their registered jurisdiction. Therefore, the net revenue is $35,000 as opposed to the gross revenue, or top line revenue, of $100,000.
Net revenue and EBITDA
Net revenue is an easy one to grasp. However, it is not the whole story of a business. To properly look under the hood of a business, you need to understand the capital structure.
The difference between EBITDA and net revenue is that EBITDA accounts for both the company’s interest and tax expenditures, as well as the non-cash expenses—assets that they have on the books.
What is EBITDA?
EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” EBITDA is used to gain a better comprehensive outlook of the business’s cash flow and financial health. This is because taxes and debt interest can be manipulated. Debt can be refinanced to be more manageable, and taxes can be mitigated by moving to a new jurisdiction.
Furthermore, to understand a company’s true full picture, you must have a good idea of the assets they hold. Even though a company’s cash flow is very much related to its value, the assets that it holds are also very important.
How to calculate EBITDA
In this example, you can see that taxes and debt interest are not the only values added to the equation. This is because when calculating EBITDA, you are incorporating a company’s assets.
Depreciation is usually tied to physical assets such as a building or machinery. Amortization is used to define intangible assets such as patents or licensing. The important aspect here is that although the assets typically don’t affect the company’s cash flow, they are an important aspect of valuing a company.
| Company A Net Revenue | |
|---|---|
| Oranges Sold | $100,000 |
| Revenue (Top Line) | $100,000 |
| COGS | $30,000 |
| Operating Expenses | $20,000 |
| Debt Interest Payments | $10,000 |
| Tax Payment | $5,000 |
| Net Revenue | $35,000 |
| Debt Interest Payments | $10,000 |
| Tax Payments | $5,000 |
| Depreciation and Amortization | $10,000 |
| EBITDA | $60,000 |
Revenue vs. EBITDA ratios and margins
When looking at a company’s health, one of the first things you will look at is the EBITDA ratio, also known as an EBITDA margin. This is the difference between the revenue and EBITDA. Typically, it is said that a margin of 10% and above between EBITDA and revenue is considered very good.
TSMC EBITDA margin
A real-life example of this can be done by taking a look at the Taiwan Semiconductor Manufacturing Company (TSMC). Here we can take a look at TSMC’s EBITDA vs. revenue over the last couple of years.
| Date | Revenue | EBITDA | EBITDA margin |
|---|---|---|---|
| 2021-09-30 | $55.93B | $38.14B | 68.20% |
| 2021-06-30 | $53.20B | $36.57B | 68.74% |
| 2021-03-31 | $50.29B | $34.41B | 68.42% |
| 2020-12-31 | $47.69B | $32.00B | 67.09% |
| 2020-09-30 | $44.37B | $28.76B | 64.83% |
| 2020-06-30 | $41.62B | $25.92B | 62.28% |
| 2020-03-31 | $38.98B | $23.99B | 61.54% |
You can see that there is a difference between the revenue and EBITDA. TSMC has a whopping EBITDA margin of over 60% in most cases, which is much higher than the standard 10% or above.
There could be a few reasons for this. For one, semiconductor manufacturing requires a tremendous amount of assets and capital expenditures. These expenditures might lower the net revenue of the business. Still, the value and cost of the assets are added back through EBITDA’s addition of depreciation and amortization.
Revenue, EBIT, and EBITDA
EBIT (for “earnings before interest and taxes”) is similar to EBITDA except for one key difference. EBIT only adds back the interest on the debt and the taxes when calculating it, not the depreciation and amortization of a company’s assets.
To get a good picture of what each one measures, this simple table should suffice:
| Income from selling goods and services | COGS | Operating income | Interest | Tax payments | Depreciation | Amortization | |
|---|---|---|---|---|---|---|---|
| REVENUE | ✓ | ||||||
| EBIT | ✓ | ✓ | ✓ | ✓ | ✓ | ||
| EBITDA | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ |
FAQs
Can EBITDA be higher than revenue?
No, this is not possible. Because EBITDA considers some business expenses and revenue does not, EBITDA will never be higher than revenue. Therefore, you also can’t have an EBITDA revenue ratio greater than 1.
How EBITDA is calculated?
EBITDA is calculated by taking the net revenue of the company and adding back the taxes, interest payments, deprecation, and amortization.
Is EBITDA the same as gross profit?
No, gross profit does not take into account the same things as EBITDA, such as depreciation and amortization. Instead, gross profit only considers the profit a company makes after accounting for the cost of goods sold.
Key Takeaways
- The income generated by a business by selling its goods or services is known as the revenue of a company.
- Although revenue and revenue growth are important, they don’t take into account the full picture of business operations and assets. For this, we use EBITDA.
- EBITDA focuses on the overall profitability of a business and offers a more comprehensive approach than examining the company’s depreciation and amortization expenses.
- A company’s revenue and EBITDA might differ substantially. This difference can be measured using an EBITDA ratio or margin.
- Revenue, EBIT, and EBITDA are different ways to measure businesses’ profitability across alternative capital structures.
Share this post: