From Gross Profit to Free Cash Flow: 9 Profit Metrics You Can't Ignore


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Profits are key to running or buying a business.

The types of profit you need to know:

Gross Profit

= Revenue - COGS

This tells you how much profit is left after each sale.

If your margins are negative here then you don't have a business.

You are selling $1 for $0.80.

Volume won't fix the problem.

Net Operating Income

= Gross Profit - Operating Expenses

Often equated with EBITDA, but it can be very different if there is depreciation.

Same as Net Income if there is no Other Income.

Net Other income

= Net Other Income - Net Other Expenses

This is income from activity outside your usual operations.

This can be a lot or nothing depending on the business.

Net Income

= Revenues - Total Expenses

Net income is what you have left over from all your revenue after all your expenses.

EBITDA (not on P&L)

= Net Income + Interest Expense - Interest Income + Taxes + Depreciation + Amortization

Often used to value companies as an estimate for free cash flow.

Higher because it removes capital structure, taxes, & depreciation.

These are real costs so beware.

EBIT (not on P&L)

= Net Income + Interest + Taxes

Profitability from core operations, excluding the impact of interest expenses and taxes.

It is less affected by a company's capital structure and tax situation compared to Net Income.

Free Cash Flow (not on P&L)

= Operating Cash Flow - Capital Expenditures - Working Capital Changes

FCF is cash available for distribution or reinvestment.

It accounts for your company's operating performance & its investment activities.

FCF is what you can buy a beer with.

Adjusted EBITDA (not on P&L)

= EBITDA + Add-Backs

The adjustment is to remove irregular or other one-time items that may not be indicative of a company's ongoing operations. Can be very subjective.

It can be things like personal expenses, overpaid relatives, etc.

Seller’s Discretionary Earnings (“SDE”)

= Adjusted EBITDA + Owner Compensation (one full-time owner)

This is the total financial benefit that a single full-time owner-operator would get from the business in a year.

SDE is always greater than EBITDA