"Net Income from continuing operation" vs "Net Income"

I don’t know if anyone got trapped by this CFAI end of chapter question. (Price and EV mulitples) P354

Basically the question 13 uses the “Net Income from continuing operation” to back into EBITDA. I am not sure if that’s correct.

Basically the books says EBITDA = “Net Income from continuing operation” + Int exp + D&A + tax

Why not use Net Income? Below the line item is not part of the equation, right?

I don’t have the book here at the moment, but is there a reason you don’t think this equation is correct?

Net Income From cont = Net Income - Net Inc from discont operation.

since we are working back towards EBITDA, i don’t think there’s any need for Net Income.

Probably the thing is that income from discont oper. is not sustainable (i.e. is not going to appear eg. next year or in 2 years) so we should not use it to comparisons. Thus, NI from cont oper is used. Below or above the line plays no role here IMO.

Also, net income includes, for example, gains and losses from the sale of PP&E, available-for-sale securities, and so on, and unusual or infrequent items, none of which are from operations.

^This all makes sense for an adjusted EBITDA but, and i dont have my book on me either, doesnt the OP state its jut a work back from NI to get reported EBITDA?

IF in the exam they say “ADJUSTED EBITDA” and you have net income from cont. use that!!!

if not… EBIT+D&A (aKA regular EBITDA)

Remember in Equity (privative company valuation)… you will need to adjust EBITDA aKa normalize it too!

The book does not specify “Adjusted” EBITDA, it ask you to calculate EV/EBITDA ratio and provide two version of Net Income to choose from.

The answer says “EBITDA = Net income (from continuing operations) + Interest expense + Taxes + Depreciation + Amortization”

I guess CFAI clearly prefer one over the other.

That’s why you use operating. EBITDA is calculated prior to any non operating income i.e. minority interests etc.

^Yes, but to reconcile from NI you will need to adjust for those non-oper items to get back to EBITDA right? My take on this posts is not valdiity of forecasting using non-oper vs oper (I think we all understand this) but rather semantics of stating to use EBITDA but actually scrubbing ebitda into more of forecasting friendly figure.

If these entries were structured on an income statement it would look like;


D/A $4

Interest $5

EBT $11

Taxes $3

Net income-continuing ops $8

Income from non-continuing ops $4

Net Income $12

I think using NI as a workback would give you an inflated figure (EBITDA=$24) because doing so would have accounted for income from non-continuing operations as an operational figure