EBITDA and net income, and how the statements connect

Two profit figures dominate analyst conversation: net income and EBITDA. They answer different questions, and confusing them is a classic mistake.

Net income (lucro liquido)

The bottom line of the income statement — profit after everything: operating costs, interest, depreciation and tax. It is what legally belongs to shareholders, but it is affected by financing choices and non-cash charges, so it can swing for reasons unrelated to the core business.

EBITDA

EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization. You build it back up from operating profit:

Operating profit (EBIT)           250
+ Depreciation & amortization     + 80
= EBITDA                          330

By stripping out financing (interest), tax regimes, and the non-cash charges of depreciation and amortization, EBITDA tries to show the cash-generating power of the core operation — useful for comparing companies with different debt levels or in different tax countries.

EBITDA's limits

EBITDA is not cash flow and not profit. Its famous flaw: it ignores capex. A business that must constantly replace expensive machinery has a flattering EBITDA but thin real cash flow. Treat a high EBITDA with low free cash flow with suspicion.

How the three statements connect

The statements are one linked system, not three islands:

• Net income from the DRE flows into equity on the balance sheet (as retained earnings) and is the starting point of the operating section of the cash-flow statement.
• Capex on the cash-flow statement increases assets (property, plant, equipment) on the balance sheet, then returns over years as depreciation on the DRE.
• The cash-flow statement's net change in cash updates the cash line of the balance sheet.

Read together, they triangulate the truth: the DRE claims a profit, the cash-flow statement proves whether cash backed it, and the balance sheet shows the cumulative result on the company's net worth.