Earnings before interest, taxes, depreciation, and amortization (EBITDA) and revenue are financial performance measures of a business. The main difference between them is that revenue measures sales and other income activities, while EBITDA measures how profitable the business is.
What’s the Difference Between EBITDA and Revenue
|Income Statement||Bottom line and expense section of income statement||Top line of income statement|
|Calculation||Net income + interest + taxes + depreciation + amortization||Total income from all business operations|
|What It Measures||Profitability||Sales activity|
Revenue is the first line of a company’s income statement. That’s why revenue is often referred to as “the top line.” By contrast, the “bottom line” is net income: what’s left for shareholders after all expenses and obligations are paid.
EBITDA is derived from net income, and the interest, taxes, depreciation, and amortization added back to get EBITDA can all be found in the expenses section of the income statement.
Revenue is the sum of income from the sale of goods and services. Revenue from one-time events and investment income are listed separately. Revenue is the first line of the income statement, and managers often refer to sales growth as “top line” growth.
Calculate EBITDA by adding interest, taxes, depreciation, and amortization to net income. An alternate way to calculate EBITDA is to add up operating income, depreciation, and amortization.
What It Measures
Revenue measures sales activities and can reflect how successful a company is in the market. Revenue growth measures how sales are increasing or decreasing over time—it can be used as a benchmark to other companies or as a metric for sales and marketing campaigns. Additionally, revenue can be used for product initiatives, new lines of business, and the company’s strategic plan.
EBITDA measures profitability and potential. Since interest, taxes, depreciation, and amortization are outside of management’s operational control, adding these items back to net income is a better way to measure how well the business is run.
The Financial Accounting Standards Board (FASB) is widely recognized as the authority that establishes the rules and standards of Generally Accepted Accounting Principles (GAAP). Revenue is reported on the income statement according to GAAP and FASB standards, but EBITDA is not.
Companies can use different methods to report EBITDA, so investors have to be cautious in using it for comparison purposes.
What It Means to Investors
Because EBITDA adds factors that are outside a company’s control, you get a picture of the company’s income based on factors it can control, like overhead costs, salaries, and research and development. Consequently, EBITDA helps you understand if a company is being run well.
In addition to giving you a general sense of how well a company is being run, you can use EBITDA for calculations called “multiples.” Investors use multiples to value company stock prices and compare the company to its competitors, its industry, and the market.
A company that has a lower multiple than its industry may be considered undervalued, while a company that has a higher multiple may be considered overvalued. Investors can use publicly available industry multiples for comparisons.
The EBITDA multiple is widely used to value a business based because it is a measure of profit and potential. Also known as the “enterprise value to EBITDA” (EV/EBITDA) multiple, it measures market capitalization plus debt minus cash to EBITDA.
EV/EBITDA helps investors focus on how the business is run because it excludes items that are influenced by accounting decisions and government policy. Companies that have a lot of debt and interest will have higher ratios than companies that don’t.
Revenue multiples, on the other hand, value the business based on the revenue it generates. Revenue multiples can be used for startup and early-stage companies that may not have earnings or show losses. Investors may also look at revenue multiples because revenue is not heavily influenced by accounting decisions.
The price-to-sales revenue multiple measures the market capitalization to sales. Price-to-sales is useful for cyclical companies that are very sensitive to the business cycle. Price-to-sales should be used to compare companies in the same industry because profit margins are similar.
The EV-to-sales multiple is a little more complex than price-to-sales. Add market capitalization and debt, then subtract cash to sales. Then, divide that total by revenue. This multiple makes a distinction between companies that carry high debt and interest loads to companies that don’t.
The Bottom Line
EBITDA and revenue are two key metrics that individuals and companies use to assess a business, and there are distinct differences between the two. EBITDA measures profit and potential, while revenue measures sales activity. Revenue is a GAAP measure, while EBITDA is a non-GAAP measure. EBITDA multiples consider enterprise value and EBITDA, while revenue multiples calculate both the relationship between market cap and sales and the relationship between enterprise value and sales.