ModeldrillEBITDA to net income
Net income = EBITDA - depreciation and amortization (giving EBIT) - net interest expense (giving EBT) - income tax. Tax = EBT x tax rate when EBT is positive, and zero (or an NOL) when it is negative. The result flows to retained earnings and starts the cash flow statement.
Syntax
EBIT = EBITDA - D&A; EBT = EBIT - Interest; Tax = MAX(0, EBT) x rate; Net income = EBT - Tax| Part | What it is |
|---|---|
D&A | Depreciation and amortization from the fixed asset schedule |
Interest | Interest expense less interest income, from the debt schedule |
rate | Effective tax rate |
Examples
EBITDA 200, D&A 50, interest 30, tax rate 25%
EBIT = 150, EBT = 120, Tax = 30Result: Net income 90
With interest income of 5: EBT = 150 - 30 + 5 = 125
=125 * (1 - 25%)Result: 93.75
Loss year: EBITDA 20, D&A 50, interest 10
EBT = -40, Tax = MAX(0, -40) * 25% = 0Result: Net income -40
Common mistakes
- Taxing EBITDA or EBIT instead of EBT: tax is computed after interest.
- Showing a tax credit in loss years with a plain EBT x rate formula; wrap EBT in MAX(0, ...) or build an NOL schedule.
- Hard-coding D&A or interest in the income statement instead of linking to the PP&E and debt schedules.
Practice EBITDA to net income
These drills check your answer on live data, free, no account needed.
- From EBITDA to net incomeComplete the bottom of the income statement: EBIT (row 7), earnings before tax (row 9), tax at the rate in B2 with no tax in a loss year (row 10) and net income (row 11).
- Tax only when there is a profitFill tax expense in row 6 at the rate in B2. In a loss year the tax is zero, not a negative number. Use MAX.
- Interest on the opening debt balanceA term loan is repaid in equal amounts. Fill the opening balance for later years (row 5), the closing balance (row 7) and interest expense (row 8), charging the rate in B2 on the opening balance of each year.
Questions
Where does net income go after the income statement?
To retained earnings on the balance sheet (less dividends) and to the first line of the cash flow statement under the indirect method.
What is the difference between EBIT and EBT?
EBIT is operating profit before interest; EBT is after interest but before tax. Interest is the only line between them for most companies.
Related
- EBITDAEBITDA = EBIT + depreciation and amortization, or net income + interest + taxes + D&A. Exact worked examples, what EBITDA leaves out and the usual mistakes.
- Tax schedule with NOLsHow to model income tax that is only paid on profits, with net operating losses carried forward to shield future income. MAX and MIN formulas and an example.
- Three-statement modelHow a three-statement model links net income, depreciation, capex, working capital, debt and cash so the balance sheet balances. Build order, links, check.
- Cash flow from operationsCFO = net income + D&A + other non-cash charges - increase in working capital. How the indirect method works line by line, a worked example and sign errors.