EBITDA vs Operating Income: The D&A Gap, Add-Backs and Two SaaS 10-Ks

Operating income is revenue minus all operating costs, including depreciation and amortization, and it is a GAAP line. EBITDA adds depreciation and amortization back, and when built from net income as the SEC defines it, it also keeps interest income and other non-operating items. The gap is mostly D&A, which in SaaS is largely amortized capitalized software.

Most explanations stop at "EBITDA = operating income + D&A." That shortcut is close for many companies and wrong for the ones that hold a lot of cash or book gains below the operating line. It also says nothing about the add-backs that turn EBITDA into adjusted EBITDA, which is the number SaaS companies actually headline. This guide works through the gap line by line, shows how capitalized software and capitalized commissions move it, sets out the SEC rules that govern it, and then reconciles two real 10-Ks: Paycom for 2025 and Paylocity for fiscal 2026. For the separate question of what sits between operating income and net income, see ORM's operating income vs net income guide.

What is the difference between EBITDA and operating income?

Operating income keeps depreciation and amortization as costs; EBITDA removes them. That is the core difference, and in a SaaS company it is mostly one item: amortization of software development costs that were capitalized in earlier years. The table shows three different numbers, not two. When someone quotes "EBITDA" for a software company, the first question is which of the right-hand columns they mean.

Why is EBITDA higher than operating income?

Because depreciation and amortization are added back, and for a profitable SaaS company with cash in the bank, interest income usually pushes EBITDA a little higher still. The full bridge from operating income has three parts. Step 5 is where the "operating income + D&A" shortcut breaks. The SEC staff says "earnings" in EBITDA "means net income as presented in the statement of operations under GAAP," and that EBITDA should be reconciled to net income because "Operating income would not be considered the most directly comparable GAAP financial measure because EBIT and EBITDA make adjustments for items that are not included in operating income" (SEC C&DIs 103.01 and 103.02). So EBITDA carries interest income, investment gains and foreign exchange results that operating income leaves out.

EBITDA can therefore come in below operating income. A company with small D&A and a large foreign exchange loss or investment write-down will show it. ORM's EBITDA calculator computes both routes from the same inputs so you can see whether they agree.

EBIT vs operating income vs EBITDA

EBIT sits between the other two: it keeps D&A like operating income, but it keeps non-operating items like EBITDA. The fourth row is what most people calculate when they say EBITDA, and for many companies it is a fine internal number. It just is not what a public company files as EBITDA. If you use it in a board pack, label it, and keep using the same definition every quarter.

How capitalized software widens the gap

When a SaaS company capitalizes developer time, that cost leaves the R&D line and returns later as amortization, which EBITDA adds back. Under GAAP, qualifying costs to build internal-use software are recorded as an asset and amortized over its useful life. Paylocity, for example, amortizes most capitalized software "over a two- to three-year period while certain projects that support our main processing activities are amortized over ten years" (Paylocity fiscal 2026 10-K).

That choice moves EBITDA far more than operating income. Here is an illustrative pair of companies with identical cash spending.

All numbers are illustrative. Company B's EBITDA margin is double Company A's, while its operating margin is two points higher and its cash spending is the same. EBITDA gains the full $3,000,000 capitalized. Operating income gains only the difference between what was capitalized this year and what was amortized, $1,000,000. Free cash flow, before tax effects, does not move at all, because the capitalized amount shows up as capital spending. That is why free cash flow is the check on any SaaS EBITDA figure, and why the opex vs capex decision for software matters to how profitable a company looks.

The real filings show the same effect at scale. Paycom capitalized $152.9 million of software development costs in 2025 and amortized $109.0 million (Paycom 2025 10-K). Paylocity capitalized $81.8 million in fiscal 2026, including $11.8 million of stock-based compensation, and amortized $70.5 million (Paylocity fiscal 2026 10-K).

How capitalized commissions affect EBITDA and operating income

Capitalized sales commissions do not widen the EBITDA gap, because their amortization is a selling expense, not D&A. Under ASC 340-40, companies record the incremental cost of obtaining a contract, mainly commissions, as an asset when the benefit lasts more than a year, then spread it over that period. The amortization lands in sales and marketing (and sometimes cost of revenue or G&A), so it reduces operating income, EBITDA and adjusted EBITDA alike.

What it does change is the gap between all three earnings measures and cash. When a company is growing, it capitalizes more commissions each year than it amortizes, so reported expense runs below cash paid.

Sources: deferred contract cost tables in the Paycom 2025 10-K and Paylocity fiscal 2026 10-K; the last column is ORM's arithmetic.

The amortization period is an estimate, and changing it moves earnings. Paycom amortizes over 10 years, the estimated life of a client relationship. Paylocity extended its period from seven to eight years effective June 30, 2026, and says the change "is expected to increase fiscal 2027 Adjusted EBITDA margins by approximately 120 to 140 basis points." No customer behavior changed; the expense was spread over one more year. When you compare two SaaS companies on EBITDA or operating margin, check their commission amortization periods first. This is an explanation of how the accounting works, not tax or accounting advice.

Real example 1: Paycom, 2025

Paycom's operating income was $567.2 million, EBITDA $799.2 million and adjusted EBITDA $882.3 million, on $2,051.7 million of revenue. Figures are from the Paycom Form 10-K for 2025 (statement of comprehensive income and the net income to adjusted EBITDA reconciliation), in USD millions; margins are ORM's arithmetic. The 2025 steps add to $799.1 against the reported $799.2 because the filing rounds each line to $0.1 million.

How to read it:

• Other income is $55.6 million of the gap. It includes interest earned on Paycom's own funds and a $35.6 million gain from amending its arena naming rights agreement. EBITDA keeps that gain; adjusted EBITDA takes it back out. Operating income + D&A never had it.
• EBITDA was flat while operating income fell. Operating income dropped $67.1 million, yet EBITDA rose $0.9 million, because D&A grew $30.4 million and other income grew $37.5 million. A reader who only saw EBITDA would miss the operating decline.
• Stock compensation can run backwards. In 2024, a forfeited executive award reversed $117.5 million of previously recorded expense, so stock-based compensation was a $22.9 million credit and adjusted EBITDA came in below EBITDA. The 2024 reversal sat in general and administrative expense, which is the main reason that line rose $120.4 million in 2025, when the add-back returned to $118.7 million.
• Cash ran well below adjusted EBITDA. Operating cash flow was $678.9 million and purchases of property and equipment, which include capitalized software, were $270.9 million, leaving $408.0 million of free cash flow, 19.9% of revenue, against a 43.0% adjusted EBITDA margin.

Real example 2: Paylocity, fiscal 2026

Paylocity's operating income was $386.0 million, EBITDA $504.9 million and adjusted EBITDA $654.9 million, on $1,771.3 million of revenue. Figures are from the Paylocity Form 10-K for the fiscal year ended June 30, 2026, in USD thousands; margins are ORM's arithmetic. How to read it:

• Stock compensation is the biggest single step. At 8.1% of revenue it is larger than all of D&A, and it accounts for most of the 15.2-point distance between the operating margin and the adjusted EBITDA margin.
• Most of D&A is software. $70.5 million of the $111.8 million was amortization of capitalized internal-use software, about 63%, mostly recorded in cost of revenues.
• Here the shortcut works. Paylocity's other income is small, so operating income + D&A lands within 0.4 points of reported EBITDA. Compare Paycom, where the same shortcut misses by $55.7 million.
• Free cash flow sits between the GAAP and adjusted numbers. Operating cash flow of $533.3 million, minus $69.3 million of capitalized software and $36.2 million of other capital spending, gives $427.8 million, 24.2% of revenue.

When is EBITDA the better measure, and when is operating income?

Use operating income when the question is whether the business makes money, and EBITDA when the question is how much debt or value the earnings can support. Lenders work from EBITDA because it approximates earnings available before capital spending and financing. Both example companies carry covenants tied to ratios: Paylocity's revolving credit agreement sets a maximum net debt ratio of 4.00 to 1.00 and a minimum interest coverage ratio of 2.00 to 1.00, and Paycom's requires a consolidated interest coverage ratio of at least 3.0 to 1.0 and a consolidated debt ratio of no more than 3.0 to 1.0, per their 10-Ks linked above. The 10-Ks do not print the earnings definition behind those ratios; it sits in the credit agreement itself.

Valuation work uses both. In Aswath Damodaran's January 2026 data, the 309 US firms in Software (System & Application) with positive EBITDA traded at 24.48 times EBITDA and 32.41 times EBIT (Damodaran, Enterprise Value Multiples by Sector). Since the enterprise value is the same in both ratios, that implies EBIT for the group was about 76% of EBITDA. A multiple only means something next to the earnings measure it was computed on, so never apply an EBITDA multiple to operating income or the reverse.

SEC rules for EBITDA and adjusted EBITDA

Public companies can report EBITDA and adjusted EBITDA, but only with the GAAP number beside them and a reconciliation. Two rules apply: Regulation G covers any public disclosure, including earnings releases and calls, and Item 10(e) of Regulation S-K covers SEC filings. The SEC staff's interpretations of both are on sec.gov.

• Equal or greater prominence. In a filing, the most directly comparable GAAP measure must appear with equal or greater prominence than the non-GAAP one (Item 10(e)(1)(i)(A)). The staff lists as examples leading with adjusted EBITDA in a headline, or calling it "record" without describing the GAAP number in the same way (C&DI 102.10(a)).
• Reconcile to net income, not operating income. EBITDA used as a performance measure is reconciled to net income (C&DI 103.02), and it may not be shown per share.
• Only the standard formula gets the plain name. A measure calculated differently "should not be characterized as 'EBIT' or 'EBITDA'" and needs a distinct title such as "Adjusted EBITDA" (C&DI 103.01).
• No "non-recurring" label for charges that recur. A company may not adjust out an item described as non-recurring, infrequent or unusual if a similar charge is reasonably likely within two years or occurred in the prior two years (Item 10(e)(1)(ii)(B)).
• Normal cash operating costs stay in. Excluding "normal, recurring, cash operating expenses necessary to operate a registrant's business" can make a measure misleading (C&DI 100.01).
• Explain why. The filing must say why management thinks the measure is useful to investors and, if material, what else management uses it for (Item 10(e)(1)(i)(C) and (D)).

Both companies above follow this pattern: each names net income as the most directly comparable GAAP measure, reconciles to it line by line, and lists limitations, such as Paylocity's statement that adjusted EBITDA "does not reflect our ongoing or future requirements for capital expenditures." Private companies are not bound by these rules, but a buyer or lender will expect the same reconciliation. Not legal or accounting advice.

How should a SaaS board see the two numbers?

Show one bridge, operating income to adjusted EBITDA, with the same lines every quarter. Pete Furseth's rule for board numbers is "If you show one number on one slide, that number better show up on the next, or there should be a clear explanation for why it changed." Adjusted EBITDA fails that test more often than any other figure in a board pack, because its add-back list tends to grow when the quarter is weak.

The fix is the same idea ORM uses for retention. Pete's favorite chart for a SaaS CFO is a monthly ARR waterfall where beginning ARR equals the prior month's ending ARR and every movement in between is named: "This reconciling waterfall by month is magic." Apply that to profit. Start at operating income, add D&A, other income, stock-based compensation and each named item, and end at adjusted EBITDA. Put free cash flow on the same slide. If a line appears that was not there last quarter, it gets its own sentence. For the wider set of numbers that belong on that slide, see ORM's guide to financial KPIs, and for reading EBITDA as a percentage of revenue, the EBITDA margin entry.

EBITDA vs operating income formulas for Excel and Google Sheets

With revenue in B2, operating income in B3, depreciation and amortization in B4, other income net of interest expense in B5, interest expense in B6, income tax in B7, net income in B8 and stock-based compensation in B9:

Inputs from the Paylocity 10-K: B2 1,771,326; B3 385,993; B4 111,797; B5 1,310; B6 5,828; B7 117,562; B8 269,741; B9 144,147. B9 is stock-based compensation plus related employer payroll taxes, so the "before stock compensation" row is $5,815 short of reported adjusted EBITDA, which also removes other named items.

Where ORM fits

Every line in these bridges starts with revenue, and next year's revenue starts with the forecast. ORM builds forecast and capacity models for B2B SaaS companies from CRM and finance data and targets 95% forecast accuracy. A revenue forecast that lands inside its range makes the operating income and EBITDA in the plan numbers a board and a lender can rely on.

Sources

All checked on November 12, 2026. This page explains how these measures are calculated and reported; it is not tax, legal or accounting advice.

• Paycom Software, Inc., Form 10-K for the year ended December 31, 2025 (SEC EDGAR): statement of comprehensive income, net income to adjusted EBITDA reconciliation, cash flow statement, capitalized software and deferred contract cost notes, stock-based compensation note, credit agreement covenants.
• Paylocity Holding Corporation, Form 10-K for the fiscal year ended June 30, 2026 (SEC EDGAR): statements of operations, adjusted EBITDA reconciliation and limitations, capitalized internal-use software, deferred contract costs and the seven-to-eight-year change, cash flow statement, credit facility covenants.
• SEC Division of Corporation Finance, Non-GAAP Financial Measures interpretations (last updated December 13, 2022): Questions 100.01, 102.10, 103.01, 103.02.
• 17 CFR 229.10(e), Item 10(e) of Regulation S-K and 17 CFR 244.100, Regulation G (eCFR).
• Aswath Damodaran, Enterprise Value Multiples by Sector (US), data as of January 2026.