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