If you want to properly assess your company’s financial health, use either EBITDA or revenue metrics, or better both. Each serves distinct analytical purposes, helping you make informed decisions about a company’s financial position, performance, and potential for sustainable growth. That means spotting areas of strength to build on and areas that may need some extra attention. 

In this article, we’ll break down the differences between revenue and EBITDA, revealing core insights on metrics, formulas on how to calculate EBITDA and revenue with examples, and practical tips on when to use each.

What is EBITDA

EBITDA (meaning Earning Before Interest, Taxes, Depreciation, and Amortization) measures a company’s operating profitability by showing how much money the company earns from its core business activities without considering financing, taxing, and accounting factors. 

How to calculate EBITDA

To calculate EBITDA, take net income and add back interest, taxes, depreciation, and amortization. The formula is the following:

EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization

Here is an example of EBITDA calculation: 

Company A has: 

  • Revenue: $1,000,000
  • Cost of Goods Sold (COGS): $400,000
  • Operating Expenses: $200,000
  • Depreciation: $50,000
  • Amortization: $20,000
  • Interest Expense: $30,000
  • Taxes: $50,000
  1. First, let’s calculate net income.

Net Income = Revenue – COGS – Operating Expenses – Depreciation – Amortization – Interest Expense – Taxes

Net Income = $1,000,000 – $400,000 – $200,000 – $50,000 – $20,000 – $30,000 – $50,000

So, the company’s net income is $250,000.

  1. Now, we take the above formula and calculate EBITDA:

EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization

EBITDA = $250,000 + $50,000 + $20,000 + $30,000 + $50,000

So, in this example, the company’s EBITDA is $400,000.

As we see, this formula isolates profits from operating activities, excluding the impact of financing and accounting choices.

EBITDA pros and cons

Surely, EBITDA is a crucial financial metric as it provides a clear view of a company’s operational profitability and is useful for comparing companies within the same industry to assess their position in the market and growth potential.

However, it has several limitations:

  • It ignores the cost of capital investments like equipment and property, which can be important for some businesses.
  • It doesn’t include interest and taxes, which might overstate a company’s operational performance, especially if it has high debt or hefty tax obligations.
  • It doesn’t measure a cash flow as it adds back non-cash expenses to net income.
  • It’s not accepted by all international reporting standards, which can complicate cross-border comparisons.

What is Revenue

Revenue (also known as top-line revenue, gross revenue, or sales) is the total amount of money a company earns before subtracting any expenses. Revenue is the broadest indicator of a company’s business scale—an engine of its economic growth. If a business doesn’t gain customers or grow existing revenue, it won’t last long. 

Revenue vs earnings

Many business newcomers confuse these two metrics. So, let’s clarify them. 

Revenue is the total amount of money a company earns from its sales, while earnings are the profits left after deducting all the expenses from the revenue.

A notable tip: To calculate EBITDA, we take earnings (“net income” in the formula), not revenue.

How to calculate revenue

Revenue calculation is straightforward: you just need to multiply the total price of goods by the number of units sold. For service industries, you simply add up the total service charges billed to clients. 

Here is an example for product-based industries:

A company sells widgets for $10 each, and in a month, it sells 400 widgets.

Revenue = $10 × 400 = $4,000

So, the company’s revenue is $4,000.

Another example for service-based industries:

A consulting firm charges $100 per hour for its services, and in a month, it provides 50 hours of consulting to clients.

Revenue = $100 × 50 = $5,000

So, the company’s revenue is $5,000.

Revenue pros and cons

Revenue is very easy to calculate, and it provides a clear insight into market activity and business scale. 

However, just like EBITDA, growth revenue also has limitations:

  • It doesn’t account for costs such as marketing, production, and administrative expenses, which means no full picture of profitability.
  • It can be misleading as high revenue doesn’t guarantee profitability—even with high sales numbers, a company can operate at a loss.
  • It doesn’t give a long-term view because it can be influenced by one-time sales or seasonal fluctuations. 

The difference between revenue and EBITDA

The difference between top-line revenue and EBITDA lies in their nature and purpose. While revenue is the gross income figure from which we subtract costs to get net income, EBITDA is a derivative of net income, adjusted for certain expenses like interest, taxes, and depreciation. 

Revenue measures total income from business activities, helping grasp the scale of business operations. Higher revenue signifies increased business activity, indicating market growth rather than profitability. 

Conversely, EBITDA focuses on earnings from regular business activities before considering tax and finance-related decisions. It helps measure profitability and operational efficiency. A high EBITDA indicates effective control over the costs directly associated with business operations, potentially leading to profitability.

Revenue vs EBITDA: when to use each metric

EBITDA and revenue are both vital financial metrics for your business, even though serving different purposes. If you still hesitate which metric to use, here’s a short breakdown:

  • Use revenue for growth tracking. It helps analyze growth trends, understand a company’s size, and compare it with others in the industry. In fact, it shows if a company is expanding its market reach.
  • Use EBITDA for operational efficiency. It helps assess how well operations are managed without considering external factors like investment capital and tax policies. 

It’s important to note that both EBITDA and revenue are valuable and should be measured and tracked regularly. Taking a holistic approach is key to your business success. Investors appreciate founders who examine their companies from various perspectives. 
If you want to know which other metrics to track, explore our blog articles on the most important KPIs in SaaS, top sales and marketing metrics, and leading vs lagging metrics. And if you want to check your KPIs, try our startup KPI dashboard. It will help you understand where you stand right now and if you need to fix anything.

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Hello! I'm Ruslana, a Content Writer at Waveup. Based on my background in marketing research and business analytics, and my current collaboration with the savvy team at Waveup, I'm excited to share my insights and learnings with you.