EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Net income deducts these expenses, showing a business’s profit or loss records for a given period.
A store owner can report positive EBITDA while posting a net loss. Reading both figures shows you how borrowing costs, income taxes, and asset expenses affect profitability.
This guide covers when to use EBITDA versus net income, how to convert between them, and the pros and cons of using each.
What is EBITDA?
EBITDA is a profitability measure that adds certain expenses back to net income. Business owners and investors use it to compare earnings across similar companies with different borrowing costs, tax obligations, and long-term asset accounting methods.
The acronym has five components:
- Earnings. Earnings refers to net income. This figure accounts for revenue and other income after deducting all expenses, including interest, taxes, depreciation, and amortization.
- Interest. Interest is the cost of borrowing money, such as the interest charged on a business loan. Loan principal repayments aren’t added back when calculating EBITDA.
- Taxes. Taxes refer to income tax expenses specifically. Other business taxes recorded for the period, such as property taxes, remain in operating expenses when calculating EBITDA.
- Depreciation. Depreciation allocates the cost of a tangible asset over its useful life. For example, a retailer depreciates store equipment over the years it expects to use it.
- Amortization. Amortization allocates the cost of an intangible asset with a finite useful life over that period. A purchased patent is one example of an asset a business can amortize.
What is net income?
Net income, or net profit, is the profit or loss after deducting all expenses from revenue and other income for a period. These expenses include the cost of goods sold (COGS), operating expenses, interest, and income taxes.
The formula for net income is:
Net income = Revenue + Other income − Total expenses
For example, a business with $100,000 in revenue, no other income, and $80,000 in expenses has a net income of $20,000.
Divide net income by revenue and multiply by 100 to calculate net profit margin. In NYU Stern’s January 2026 US data on US public companies, net margins were 1.32% for grocery and food retail and 5.61% for general retail.
EBITDA formula and how to convert net income to EBITDA
To calculate EBITDA from net income, add back the interest, income taxes, depreciation, and amortization deducted for the same period:
EBITDA = Net income + Interest + Income taxes + Depreciation + Amortization
To convert EBITDA back to net income, subtract those same amounts:
Net income = EBITDA − Interest − Income taxes − Depreciation − Amortization
The operating income shortcut
Operating income is profit after operating costs, including depreciation and amortization. You can use it in this shortcut:
EBITDA = Operating income + Depreciation + Amortization
This shortcut applies when the company has no non-operating income or expenses other than interest and income taxes. For example, a gain from selling an investment affects net income but is excluded from operating income. Check for these items before using the shortcut.
Suppose a store records the following annual results, with no non-operating income or expense besides interest and income taxes:
| Line item | Annual amount |
|---|---|
| Revenue | $500,000 |
| Cost of goods sold | $300,000 |
| Other operating expenses, excluding depreciation and amortization | $120,000 |
| Depreciation | $20,000 |
| Amortization | $5,000 |
| Operating income | $55,000 |
| Interest expense | $10,000 |
| Income tax expense | $10,000 |
| Net income | $35,000 |
Add the four expenses back to net income:
EBITDA = $35,000 + $10,000 + $10,000 + $20,000 + $5,000 = $80,000
The operating income shortcut produces the same result: $55,000 + $20,000 + $5,000 = $80,000.
Reverse the calculation to recover net income:
Net income = $80,000 − $10,000 − $10,000 − $20,000 − $5,000 = $35,000
Where to find your figures
Shopify’s finance reports have sales figures you can reconcile with your accounting records. They also separate sales taxes collected from customers, which aren’t included in the income tax expense used in the EBITDA formula.
Shopify’s profit reports show product costs and gross profit for products with a cost recorded at the time of sale. Sales made before you record a cost per item stay out of these reports. Add costs to your products in your Shopify admin, and use your accounting records for earlier sales.
Use your profit and loss statements to account for all operating expenses and obtain interest, income tax, depreciation, and amortization figures. Calculate net income and EBITDA using figures from the same reporting period.
EBITDA vs. net income
Use EBITDA to compare earnings across similar businesses with different borrowing costs and depreciation policies.
During quarterly or annual financial reviews, track net income to see whether your business made a profit after all its costs and whether that profit grew or fell.
| Comparison | EBITDA | Net income |
|---|---|---|
| Focus | Earnings before four expense categories | Profit or loss after all recognized expenses |
| Interest and income taxes | Added back | Deducted |
| Depreciation and amortization (D&A) | Added back | Deducted |
| Use case | Comparing earnings across similar businesses | Assessing overall profitability and tracking profit over time |
Similarities
EBITDA and net income have two things in common:
- Earnings. EBITDA and net income both measure a company’s earnings. Both include COGS and operating expenses, although EBITDA adds back any depreciation and amortization included in those costs.
- Valuation. Both EBITDA and net income can help potential investors assess a company’s value.
Differences
The expenses counted in each calculation affect the resulting earnings figure and how investors use it. The two metrics differ in four ways:
- Expense coverage. Net income accounts for the expenses EBITDA excludes. A company with high interest costs can report positive EBITDA while recording a net loss.
- Valuation. Investors multiply EBITDA by an industry multiple to value the whole business, including its debt. They use net income to value shareholders’ stake, for example with the price-to-earnings ratio.
- Regulation. Net income reported under generally accepted accounting principles (GAAP) follows those accounting standards. EBITDA is a non-GAAP measure, subject to Securities and Exchange Commission (SEC) disclosure rules when reported by US public companies.
- General size. EBITDA is usually higher than net income because it adds expenses back. A large income tax benefit or net interest income can reverse that relationship.
Benefits and drawbacks of EBITDA
EBITDA uses income statement figures and is useful for comparing similar businesses, but it doesn’t show how much cash is available to pay bills.
Benefits of EBITDA
EBITDA has three practical benefits for measuring performance.
Adds back non-cash asset expenses
EBITDA adds back depreciation and amortization, which allocate asset costs rather than record current-period cash payments. It doesn’t measure cash generation or account for changes in working capital, such as cash spent on unsold inventory.
Negative EBITDA indicates the business is losing money before interest, income taxes, depreciation, and amortization.
Easy to calculate and interpret
You can calculate EBITDA by taking net income and adding back interest, income taxes, depreciation, and amortization.
Compare the result with previous periods and calculate EBITDA margin (EBITDA divided by revenue, multiplied by 100) to account for differences in business size.
Removes unique variables
EBITDA excludes differences in borrowing costs, income tax expense, and depreciation and amortization charges. This helps investors compare companies in the same industry, particularly when their financing arrangements differ.
Drawbacks of EBITDA
EBITDA has three limitations.
Excludes capital expenditures
EBITDA doesn’t deduct spending on long-term assets, such as replacement equipment. A retailer with aging equipment can report positive EBITDA while facing cash costs to replace it.
Isn’t a GAAP measure
EBITDA is a non-GAAP measure, but US public companies can’t redefine it freely. Under SEC guidance, US public companies reporting historical EBITDA as a performance measure must reconcile it to GAAP net income. In earnings releases and filings, net income must receive equal or greater prominence.
Adjusted EBITDA is a company’s own version of EBITDA that removes additional items, such as restructuring costs. SEC guidance requires a distinct label for these versions. Check each company’s reconciliation before comparing adjusted figures, since the exclusions differ.
Doesn’t measure liquidity
Income taxes, interest, and loan principal repayments still require cash. Review your cash flow statement, cash balance, and upcoming payment obligations to assess whether the business can meet those commitments.
Benefits and drawbacks of net income
Net income shows profit after all expenses, though debt levels and one-time events can make comparisons between companies more difficult.
Benefits of net income
Net income has three benefits for assessing a business’s financial health.
Shows total profit for the reporting period
Net income accounts for all recognized expenses, including interest and income taxes. It measures profit for a reporting period.
For incoming payment details, go to Finance in your Shopify admin and click View payouts to view your Shopify Payments payout balance and upcoming payouts. Check these amounts with your bank balance when planning payments.
Recognized under GAAP
Net income is a measure recognized under GAAP. US domestic public companies must prepare their financial statements under these standards, which govern how they record revenue and expenses.
Useful for measuring shareholder value
Net income is the basis for earnings per share (EPS), which investors use in valuation measures such as the price-to-earnings ratio. High net income doesn’t guarantee dividends, as payments depend on available cash and the company’s dividend decisions.
Drawbacks of net income
Net income has three drawbacks.
Requires context to interpret
A larger company can report more net income because it sells more. Net profit margin expresses net income as a percentage of revenue, allowing comparisons across businesses of different sizes.
Compare that margin with industry peers and previous periods to assess performance.
Impacted by one-offs
Net income can rise or fall because of one-time events, such as a gain from selling a large asset. Separate these items when evaluating recurring profitability.
Income tax changes can also affect the result. If income tax expense falls by $10,000, net income increases by $10,000, all else being equal. EBITDA stays the same because its calculation reverses income tax expense or benefits.
Less useful for comparing companies with different capital structures
Because net income deducts interest expense, two companies with similar operations can report different profits if one relies more heavily on debt.
EBITDA excludes that financing expense from the comparison, while net income reflects its impact on profit.
EBITDA vs. net income FAQ
Why is EBITDA used instead of net income?
Investors use EBITDA because it helps compare similar businesses with different borrowing costs, tax obligations, and asset accounting methods. They also use it in business valuation multiples. Read it alongside net income and cash flow to assess the expenses it excludes and the cash the business generates.
How do you convert net income to EBITDA?
To convert net income to EBITDA for the same reporting period, add back interest, income taxes, depreciation, and amortization. Add back only expenses already deducted from net income. If the company recorded an income tax benefit, subtract that benefit instead.
Is EBITDA more conservative than net income?
EBITDA isn’t more conservative than net income. It excludes expenses that net income deducts, so it usually produces a higher earnings figure. Net income accounts for more costs, including interest and depreciation. Neither figure alone establishes how much cash a business has available to spend.
Is a 20% EBITDA good?
A 20% EBITDA margin is about double the 10.11% EBITDA margin for general retail in NYU Stern’s January 2026 data on US public companies. It means $20 in EBITDA for every $100 of revenue. Whether it’s strong for your business depends on comparable competitors and the consistency of earnings.
What is a good ratio of EBITDA to revenue?
A good ratio of EBITDA to revenue depends on your industry benchmark. NYU Stern’s January 2026 data on US public companies reports EBITDA margins of 5.4% for grocery and food retail and 35.93% for system and application software. Calculate your margin as EBITDA divided by revenue, multiplied by 100, and compare it with similar businesses using the same calculation.
