Business Infographics on LinkedIn: Gross Margin vs. Operating Margin vs. Net Margin Credits to Anders… (2024)

Is EBITDA a good metric?That depends on who you ask…and what you use it for.First…➡️ What is EBITDA?EBITDA stands for Earning before Interest, Taxes, and DepreciationIt’s a very common term you’ll hear in Finance & Accounting➡️ How do you calculate EBITDA?Like the name suggests…Start with Net Income[+] add back your interest expense[-] subtract out your interest income[+] add back your taxes[+] add back your depreciation[+] add back your amortizationOK…now that we know what EBITDA is and how to calculate it…is it a good metric?➡️ Pros to EBITDA✅ Can be a good proxy for free cash flows → although not perfect, EBITDA can be a good measure of a companies free cash flows✅ Simplifies Comparisons → EBITDA helps you compare businesses in a similar industries against one another✅ Valuing a company - it’s common to use EBITDA as a multiple in order to get to a valuation✅ Focuses on operating performance → EBITDA removes metrics that aren’t part of the normal course of business✅ Widely accepted → everyone knows the term EBITDA✅ Useful for high growth companies → since depreciation & amortization are not included, it tells more of a story related to profitability & growth➡️ Cons to EBITDA❌ Ignores changes in working capital → EBITDA doesn’t account for changes in items like inventory, accounts payable, or accounts receivable❌ Is not a GAAP metric → EBITDA is not a metric that you’ll find in a Profit & Loss❌ Vulnerable to Manipulation → you’ll often times hear of an alteration of EBITDA, that can be misleading❌ Fails to consider capital structure - EBITDA won’t show you how the company is capitalized, and how much debt needs to be repaid❌ Does not Represent cash flow → EBITDA can wildly differ from your actual cash flows❌ Lacks industry specific considerations → your EBITDA won’t inform you of whether it’s a strong or weak indicator of performance in your industry❌ Ignores the Quality of earnings → income from recurring sources are more attractive than non recurring sources, but EBITDA won’t inform you of this❌ Excludes important expenses → Taxes, Interest, Depreciation, and Amortization can all be material expenses that the business facesWhat do you think?Comment with your thoughts below 👇©️ Josh Aharonoff, CPA

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Is EBITDA a good metric?That depends on who you ask…and what you use it for.First…➡️ What is EBITDA?EBITDA stands for Earning before Interest, Taxes, and DepreciationIt’s a very common term you’ll hear in Finance & Accounting➡️ How do you calculate EBITDA?Like the name suggests…Start with Net Income[+] add back your interest expense[-] subtract out your interest income[+] add back your taxes[+] add back your depreciation[+] add back your amortizationOK…now that we know what EBITDA is and how to calculate it…is it a good metric?➡️ Pros to EBITDA✅ Can be a good proxy for free cash flows → although not perfect, EBITDA can be a good measure of a companies free cash flows✅ Simplifies Comparisons → EBITDA helps you compare businesses in a similar industries against one another✅ Valuing a company - it’s common to use EBITDA as a multiple in order to get to a valuation✅ Focuses on operating performance → EBITDA removes metrics that aren’t part of the normal course of business✅ Widely accepted → everyone knows the term EBITDA✅ Useful for high growth companies → since depreciation & amortization are not included, it tells more of a story related to profitability & growth➡️ Cons to EBITDA❌ Ignores changes in working capital → EBITDA doesn’t account for changes in items like inventory, accounts payable, or accounts receivable❌ Is not a GAAP metric → EBITDA is not a metric that you’ll find in a Profit & Loss❌ Vulnerable to Manipulation → you’ll often times hear of an alteration of EBITDA, that can be misleading❌ Fails to consider capital structure - EBITDA won’t show you how the company is capitalized, and how much debt needs to be repaid❌ Does not Represent cash flow → EBITDA can wildly differ from your actual cash flows❌ Lacks industry specific considerations → your EBITDA won’t inform you of whether it’s a strong or weak indicator of performance in your industry❌ Ignores the Quality of earnings → income from recurring sources are more attractive than non recurring sources, but EBITDA won’t inform you of this❌ Excludes important expenses → Taxes, Interest, Depreciation, and Amortization can all be material expenses that the business faces

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Gross margin VS Contribution margin VS Net marginLet's summarize the differences between Gross Margin, Contribution Margin, and Net Margin:𝗚𝗿𝗼𝘀𝘀 𝗠𝗮𝗿𝗴𝗶𝗻🟣 Key Considerations:Primarily used to understand the profitability of goods sold.Does not consider operating expenses or other overheads.Gross Margin gives a snapshot of the efficiency and profitability of the production process.🟣 What it Measures:Assesses the profitability of a company after accounting for the direct cost of producing goods or services.🟣 Formula:Gross Margin = Sales - Cost of Goods Sold (COGS)/Sales🟣 When More Suitable:To assess the inherent profitability of the production process.When comparing companies within the same industry to understand production efficiency.🟣 Users:Management (to make production-related decisions).Investors and analysts (to assess the fundamental profitability of the core business operations).𝗖𝗼𝗻𝘁𝗿𝗶𝗯𝘂𝘁𝗶𝗼𝗻 𝗠𝗮𝗿𝗴𝗶𝗻🟣 Key Considerations:Focuses on the profitability of individual products or services.Reflects the amount available from sales to cover fixed costs and profit after variable costs have been paid.Contribution Margin offers insight into how individual products contribute to covering fixed costs and profit generation.🟣 What it Measures:Profitability after considering variable costs but before fixed costs.🟣 Formula:Contribution Margin=Sales - Variable Costs/Sales🟣 When More Suitable:When assessing the break-even point or deciding whether to discontinue a product. In businesses with high fixed costs to understand how much each product contributes towards covering those fixed costs and generating profit.🟣 Users:Management (for pricing decisions, production prioritization).Cost accountants and financial planners.𝗡𝗲𝘁 𝗠𝗮𝗿𝗴𝗶𝗻🟣 Key Considerations:Most comprehensive of the three margins.Considers all expenses, including operating expenses, interest, taxes, and other overheads.Net Margin provides a comprehensive view of a company's overall profitability after accounting for all expenses.🟣 What it Measures:Profitability after all expenses are considered.🟣Formula:Net Margin=Net Profit/Sales🟣 When More Suitable:For a holistic view of a company's overall profitability.When comparing profitability across different industries.🟣 Users:Investors and analysts (to assess overall company profitability).Creditors (to determine a company's ability to generate profit and repay debts).Management (for strategic decisions).This Holiday, Your Future in Finance Awaits! Unwrap your potential this festive season! Get 60% off on our comprehensive Corporate Finance Modeling Course. Learn more here 👉 https://lnkd.in/dE7FwRRQ#netmargin

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Cost management is a critical factor in managing business performance and I learned a lot from this essay. I invite you to read and digest it.

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7 Major cost drivers need Monitor these drivers and adapt your strategy as necessary to respond to market conditions to efficient balancesheet score!!

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Profit/Loss Calculation:Formula: Profit/Loss = Revenue - ExpensesExample:Revenue = $10,000Expenses = $7,000Profit/Loss = $10,000 - $7,000 = $3,000 (Profit)Gross Profit Margin:Formula: Gross Profit Margin = (Gross Profit / Revenue) x 100Example:Gross Profit = $20,000Revenue = $50,000Gross Profit Margin = ($20,000 / $50,000) x 100 = 40%Net Profit Margin:Formula: Net Profit Margin = (Net Profit / Revenue) x 100Example:Net Profit = $15,000Revenue = $100,000Net Profit Margin = ($15,000 / $100,000) x 100 = 15%Return on Investment (ROI):Formula: ROI = (Net Profit / Cost of Investment) x 100Example:Net Profit = $5,000Cost of Investment = $50,000ROI = ($5,000 / $50,000) x 100 = 10%Debt-to-Equity Ratio:Formula: Debt-to-Equity Ratio = Total Debt / Total EquityExample:Total Debt = $80,000Total Equity = $120,000Debt-to-Equity Ratio = $80,000 / $120,000 = 0.67Earnings Per Share (EPS):Formula: EPS = (Net Income - Preferred Dividends) / Average Outstanding SharesExample:Net Income = $60,000Preferred Dividends = $5,000Average Outstanding Shares = 10,000EPS = ($60,000 - $5,000) / 10,000 = $5.50Return on Assets (ROA):Formula: ROA = Net Income / Total AssetsExample:Net Income = $25,000Total Assets = $200,000ROA = $25,000 / $200,000 = 0.125 or 12.5%Inventory Turnover Ratio:Formula: Inventory Turnover Ratio = Cost of Goods Sold / Average InventoryExample:Cost of Goods Sold = $120,000Average Inventory = $20,000Inventory Turnover Ratio = $120,000 / $20,000 = 6These formulas are just a few examples of the many calculations that accounting departments use to analyze and manage financial data for decision-making and reporting purposes.

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Is EBITDA a good metric?That depends on who you ask…and what you use it for.First…➡️ What is EBITDA?EBITDA stands for Earning before Interest, Taxes, and DepreciationIt’s a very common term you’ll hear in Finance & Accounting➡️ How do you calculate EBITDA?Like the name suggests…Start with Net Income[+] add back your interest expense[-] subtract out your interest income[+] add back your taxes[+] add back your depreciation[+] add back your amortizationOK…now that we know what EBITDA is and how to calculate it…is it a good metric?➡️ Pros to EBITDA✅ Can be a good proxy for free cash flows → although not perfect, EBITDA can be a good measure of a companies free cash flows✅ Simplifies Comparisons → EBITDA helps you compare businesses in a similar industries against one another✅ Valuing a company - it’s common to use EBITDA as a multiple in order to get to a valuation✅ Focuses on operating performance → EBITDA removes metrics that aren’t part of the normal course of business✅ Widely accepted → everyone knows the term EBITDA✅ Useful for high growth companies → since depreciation & amortization are not included, it tells more of a story related to profitability & growth➡️ Cons to EBITDA❌ Ignores changes in working capital → EBITDA doesn’t account for changes in items like inventory, accounts payable, or accounts receivable❌ Is not a GAAP metric → EBITDA is not a metric that you’ll find in a Profit & Loss❌ Vulnerable to Manipulation → you’ll often times hear of an alteration of EBITDA, that can be misleading❌ Fails to consider capital structure - EBITDA won’t show you how the company is capitalized, and how much debt needs to be repaid❌ Does not Represent cash flow → EBITDA can wildly differ from your actual cash flows❌ Lacks industry specific considerations → your EBITDA won’t inform you of whether it’s a strong or weak indicator of performance in your industry❌ Ignores the Quality of earnings → income from recurring sources are more attractive than non recurring sources, but EBITDA won’t inform you of this❌ Excludes important expenses → Taxes, Interest, Depreciation, and Amortization can all be material expenses that the business facesWhat do you think?Comment with your thoughts below 👇

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Cant agree more Josh Aharonoff, CPA. We really use this one to monitor our business performance. In another side EBITDA also is an indicator to see how efficient our business is.As strategic planner, improving business value to improve our EBITDA is the key. There are some items how actually to improve EBITDA by :1. Increasing revenue through new product/services drivers.2. Mapping and focusing which product/services actually gaining more margin.3. Lowering COGS through renegotiate to the suppliers.4. Finding the technologies how to get raw material with low cost but high quality.5. Automation the process using technologies.6. Eliminate non valuable things that may not deliver value.7. Rationate the organization.8. For services company, building man power strategy with resources pooling by managed manpower resource through build, buy, and borrow scheme.9. Increase productivity by convert fixed cost to variable cost i.e for sales, delivery, and operations teams.That would be nice if we can see our EBITDA is above about the average industry and meet the target as stated in the KPI.Cheers,Wepe

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Is EBITDA a good metric?That depends on who you ask…and what you use it for.First…➡️ What is EBITDA?EBITDA stands for Earning before Interest, Taxes, and DepreciationIt’s a very common term you’ll hear in Finance & Accounting➡️ How do you calculate EBITDA?Like the name suggests…Start with Net Income[+] add back your interest expense[-] subtract out your interest income[+] add back your taxes[+] add back your depreciation[+] add back your amortizationOK…now that we know what EBITDA is and how to calculate it…is it a good metric?➡️ Pros to EBITDA✅ Can be a good proxy for free cash flows → although not perfect, EBITDA can be a good measure of a companies free cash flows✅ Simplifies Comparisons → EBITDA helps you compare businesses in a similar industries against one another✅ Valuing a company - it’s common to use EBITDA as a multiple in order to get to a valuation✅ Focuses on operating performance → EBITDA removes metrics that aren’t part of the normal course of business✅ Widely accepted → everyone knows the term EBITDA✅ Useful for high growth companies → since depreciation & amortization are not included, it tells more of a story related to profitability & growth➡️ Cons to EBITDA❌ Ignores changes in working capital → EBITDA doesn’t account for changes in items like inventory, accounts payable, or accounts receivable❌ Is not a GAAP metric → EBITDA is not a metric that you’ll find in a Profit & Loss❌ Vulnerable to Manipulation → you’ll often times hear of an alteration of EBITDA, that can be misleading❌ Fails to consider capital structure - EBITDA won’t show you how the company is capitalized, and how much debt needs to be repaid❌ Does not Represent cash flow → EBITDA can wildly differ from your actual cash flows❌ Lacks industry specific considerations → your EBITDA won’t inform you of whether it’s a strong or weak indicator of performance in your industry❌ Ignores the Quality of earnings → income from recurring sources are more attractive than non recurring sources, but EBITDA won’t inform you of this❌ Excludes important expenses → Taxes, Interest, Depreciation, and Amortization can all be material expenses that the business facesWhat do you think?Comment with your thoughts below 👇

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