While a company’s sales, also known as revenue, often get a great deal of attention from the public, business owners, managers, investors and lenders pay particularly close attention to another key metric, EBITDA. EBITDA stands for “earnings before interest, taxes, depreciation and amortization.” It is a more nuanced tool than revenue and can illuminate how well or poorly cash flow is generated from operations. Understanding revenue and EBITDA can help evaluate a company’s financial health. A financial advisor can also provide insights into EBITDA’s impact on investment potential.

What Is Revenue?

Revenue, always reported on an income statement, includes all income from business activities before expenses during an accounting period.

Revenue comes from multiple sources, including product sales, service fees, rent, and commissions. Additional revenue sources include dividends from investments and interest earned on loans issued by the company. Revenue from business activities is typically reported quarterly and annually.

What Is EBITDA?

EBITDA does not appear on income statements but focuses on operating performance. In particular, it shines a light on the business’s ability to generate cash flow from its operations.

EBITDA consists of several key financial elements that adjust net income to focus on a company’s operational performance. Each component plays a role in stripping out non-operating costs to provide a clearer view of a business’s profitability.

Earnings (net income): The company’s profit after business expenses.
Interest: Costs associated with borrowing money, such as loan payments or bond interest, which vary based on a company’s financing structure.
Taxes: Government-imposed levies on earnings, which can fluctuate based on location, tax incentives and corporate structure.
Depreciation: The reduction in value of tangible assets (e.g., machinery, equipment) over time, accounted for as a non-cash expense.
Amortization: Similar to depreciation but applied to intangible assets (e.g., patents, trademarks, goodwill) to reflect their decreasing value over time.

Depreciation and amortization are non-cash expenses recorded on an income statement but do not involve actual cash outflows. Interest and taxes do require payment in cash, but are non-operating expenses not directly affected by the business’s primary activities.

How to Calculate EBITDA

EBITDA can be calculated using different formulas. A common method starts with net income, the bottom line of an income statement. Then it adds back to it the entries for taxes, interest, depreciation and amortization. For instance, if a company had $100,000 in net income and reported owing $20,000 for taxes, $15,000 for interest, $10,000 for depreciation and $5,000 for amortization, the formula would look like this:

EBITDA = $100,000 + $20,000 + $15,000 + $10,000 + $5,000

In this case the company’s EBITDA for the period would be $150,000.

Revenue vs. EBITDA: What’s the Difference?

Revenue drives growth, while cash flow sustains daily operations. Without revenue, cash flow eventually declines. However, revenue is not the same as cash. One key distinction is that revenue is recorded when a sale is made, even if the customer hasn’t paid yet. This accrual-based approach means revenue can be reported before cash is actually received.

As the top line on an income statement, revenue serves as a key indicator of business prospects. Declining revenue often puts pressure on net income, making it harder for a company to maintain profitability.

Investors and lenders use EBITDA to assess a company’s cash flow generation. Investors and lenders calculate EBITDA to gauge whether a business can pay its bills and sustain profitability. It is also used to estimate a company’s value before a sale. Business owners compare EBITDA with industry peers to evaluate financial performance.

EBITDA is particularly valuable for analyzing capital-intensive businesses—companies that require significant investments in equipment and infrastructure. These businesses often take on large amounts of debt, making EBITDA a useful tool for assessing their financial strength.

EBITDA provides a clearer view of operational performance by excluding interest, taxes, and non-cash expenses, making it less susceptible to accounting adjustments and manipulation. By excluding interest, taxes and non-cash expenses, EBITDA provides a clearer view of operational performance. Investors and lenders favor EBITDA because it highlights a business’s earning power without distortions from financing decisions or accounting methods.

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Bottom Line

Both revenue and EBITDA are key metrics for assessing a company’s financial health and performance. Revenue is the all-important top line on a financial statement, representing income generated by the company’s sales activities before expenses as well as money it is owed. EBITDA starts at the bottom of the income statement with net income and adds back expenses that are more subject to managers’ discretion to arrive at a more accurate look at a business’s ability to generate cash.

Tips for Investing

Consider working with a financial advisor if you are looking at revenue and EBIDTA to assess a business’s performance and strength. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Besides EBITDA, another important metric is EBIT, which stands for earnings before income and taxes. The fundamental difference between the two is that EBITDA adds back in depreciation and amortization, whereas EBIT does not. EBIT will tell you how well a company can do its job, while EBITDA will estimate what kind of cash spending power a company can have.