When it comes to the profitability of business or investments, the terms Net Operating Income (NOI) and Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) are frequently used. The two terms may seem similar because they both relate to the profits earned from operations, but they are both quite different.
Net Operating Income is the standard metric for estimating the profitability of an income-generating asset, whereas EBITDA is primarily used to evaluate the performance of a company.
This article breaks down the differences between Net Operating Income (NOI) and EBITDA.
Key Takeaways
- NOI mainly measures income from a property after normal operating expenses.
- EBITDA assesses earnings before interest, taxes, depreciation, and amortisation.
- Debt payments, capital expenditures, taxes, and other cash requirements can still reduce the money available to owners.
- NOI is important for property valuation. Investors often use NOI when calculating cap rates and estimating real estate value.
- EBITDA helps compare businesses. It can make comparisons easier when companies have different financing, tax, or depreciation structures.
What is Net Operating Income?
Net Operating Income (or NOI) refers to the income generated by an income-producing asset minus operating expenses incurred, before interest, income taxes, depreciation, and capital expenditures.
It is a popular metric used in commercial real estate analysis to indicate the profitability of an asset on a normal operating basis.
NOI is essentially the profit made by a business from its operations after subtracting all expenses from its total income. NOI is useful in evaluating the profitability of an investment, especially income-generating assets like rental properties.
For example, let’s say you own an apartment complex with the following income and expense streams:
- Rent: ₹18,00,000
- Parking income: ₹90,000
- Laundry income: ₹45,000
- Total Income: ₹19,35,000
Total expenses are as follows:
- Property management: ₹1,80,000
- Repairs: ₹1,35,000
- Insurance: ₹90,000
- Property taxes: ₹2,70,000
- Utilities: ₹90,000
- Total Expense: ₹7,65,000
From the above information,
NOI will be ₹19,35,000 – ₹7,65,000 = ₹11,70,000
This means the apartment complex generated a profit of ₹11,70,000 from its operations. This number is important because it helps us understand the performance of the business without the tax implications and financing obligations. Note that mortgage interest and payments are not factored into this calculation.
Also Read About: Operating Income vs Net Income
What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is mainly used by firms and businesses. The main aim is to determine the earning power of firms and businesses before taxes, interest, depreciation, and amortization are deducted.
The EBITDA formula is:
Net Income + Interest + Taxes + Depreciation + Amortisation
It can also be derived using the equation below:
Operating Income + Depreciation + Amortisation
An example of how EBITDA is calculated is shown below:
A manufacturing organization has the following revenue and operating expenses:
- Revenue: ₹9,00,00,000
- COGS: ₹4,50,00,000
- Salaries and other operating expenses: ₹2,25,00,000
- Depreciation: ₹45,00,000
- Interest: ₹27,00,000
- Taxes: ₹36,00,000
The operating income of the firm before depreciation is:
₹9,00,00,000 - ₹4,50,00,000 - ₹2,25,00,000 = ₹2,25,00,000
EBITDA will be:
₹2,25,00,000 + ₹45,00,000 = ₹2,70,00,000
The firm’s EBITDA is ₹2,70,00,000.
EBITDA is a very useful measure when comparing the performance of companies and businesses because it standardizes the results. It is helpful when analyzing companies with varying levels of debt and taxes.
Comparing Net Operating Income and EBITDA
Imagine that you have a small hotel. The hotel makes ₹1,80,00,000 in revenue. You pay your staff, electric bill, cleaning lady, insurance, property taxes, and other expenses that come with owning a hotel.
At the end of the year, you have ₹54,00,000 in NOI (Net Operating Income).
Now let's imagine that the hotel is run through a company that has depreciation and amortization expenses.
If you then add ₹9,00,000 to ₹54,00,000 for depreciation and amortization, you may have ₹63,00,000 EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the hotel company, depending on the company's accounting structure and other expenses.
- NOI: ₹54,00,000
- EBITDA: ₹63,00,000
It does not mean that either of the numbers is wrong; it's just that they're answering different questions. While the NOI answers questions about your property, the EBITDA answers questions about your operations.
Are Cash Flow and EBITDA the Same?
This is a very important distinction. While EBITDA is a helpful metric, it is not the same as cash flow.
For instance, a company may have an EBITDA of ₹1,80,00,000 but have to spend ₹72,00,000 on new equipment.
It may also have to spend a large amount on repayments of loans and working-capital requirements, so that the company does not actually have ₹1.8 crore of cash to spend.
Similarly, NOI is not actually the cash that goes straight into the investor’s pocket.
A property owner still has to make payments on capital improvements, repayments on loans, pay reserves, and pay taxes.
NOI vs EBITDA: Which One Should You Choose?
The answer to this depends on what you are trying to analyze.
In case you are analyzing an apartment building, office building, shopping center, or some other form of income-producing property, NOI is usually a better starting point than EBITDA. On the other hand, if you are analyzing a business, EBITDA is more informative than NOI.
For example, if you are thinking of buying an apartment building, you would want to know its NOI. It is more relevant to use EBITDA if you are considering buying a software company. If you are considering buying a hotel, there is a good chance that you will come across both.
Key Differences Between NOI and EBITDA
| Basis | NOI (Net Operating Income) | EBITDA |
| Full form | Net Operating Income | Earnings Before Interest, Taxes, Depreciation & Amortization |
| Main use | Mostly used in real estate | Mostly used for businesses/companies |
| Measures | Profitability of a property from operations | Operating performance of a business |
| Formula | Income − Operating Expenses | Net Income + Interest + Taxes + Depreciation + Amortization |
| Includes | Rental/operating income minus property expenses | Business revenue minus operating costs, before D&A, interest, and taxes |
| Excludes | Interest, loan payments, income tax, depreciation, capex | Interest, taxes, depreciation, and amortization |
| Common use | Cap rate and property valuation | Business valuation and comparing companies |
| Key point | Shows how well the property operates | Shows how well the business operates |
Conclusion
NOI and EBITDA are valuable financial indicators that help analyze the performance of a company. NOI suggests how efficiently the property is operated, while EBITDA demonstrates how successfully the business is operated despite several expenses.
The most common way to differentiate between these indicators is to remember that NOI is related to real estate, and EBITDA is applicable to businesses. This implies that if someone analyzes a rental house or an apartment, NOI will be one of the critical factors to evaluate. On the other hand, if someone evaluates a business, EBITDA will be a helpful tool to determine its success.
