Ebitda formula

The income statement, also known as the profit and loss statement (P&L), provides a summary of a company's annual revenues, costs, and profits/losses. It is one of the three key financial documents, alongside the balance sheet and cash flow statement.The income statement records revenues and expenses at the time they are incurred (accrual accounting). For example, an invoice appears in a company's income statement on the day it is generated, regardless of when the payment is made. In contrast, in the cash flow statement, an expense is recorded only when the payment is actually made.Example:Suppose a company sells products worth €100,000 and receives a bill for material costs of €40,000. In the income statement, the revenue of €100,000 is recorded at the time of the sale, and the material costs of €40,000 appear simultaneously. Key Terms in the Income StatementOperating revenue: All revenue generated from the regular business operations of a company.Operating costs: These are subdivided into:COGS (Cost of Goods Sold): Costs directly incurred from producing goods, such as material and labor costs.SGA (selling, general and administrative costs): Costs that cannot be easily attributed to a single product, such as general advertising expenses.Gross profit: Operating revenue minus operating costs.Non-operating revenue and costs: Income and expenses not related to the main business activity, such as revenue from selling real estate or legal costs.Depreciation: The reduction in value of assets, such as outdated machinery.Interest: Costs of debt, which are listed on the balance sheet.Taxes: Taxes paid on EBT (Earnings Before Tax).💡Prep tip: Need to freshen up your mental math skills? Try out our Mental Math Tool. Role of the Income Statement in Consulting and Case InterviewsThe income statement is an important tool for analyzing a company’s profitability. In consulting projects and case interviews, various financial ratios play a crucial role in gaining deeper insights into a company's financial condition and performance.Analysis of Financial Ratios:Gross profit margin: This metric indicates the profitability of the core business by considering only operating revenue, COGS, and SGA. A high gross profit margin suggests that the company produces efficiently and manages its costs well.Operating margin: This includes non-operating costs and revenues, as well as depreciation. This metric provides a more comprehensive view of the company’s profitability.Net profit margin: This metric takes into account all costs, including interest and taxes, and is an indicator of the overall profitability of the company.By comparing the gross margin and the net profit margin, consultants can draw conclusions about the causes of variations. If the net profit margin differs while the operating margin remains stable, this indicates that differences in tax and interest payments are the cause. Case Example💡To make the whole process of presenting the income statement and its relevance for case interviews clearer, we illustrate this calculation using an example case from Oliver Wyman.Case PromptTrainCo is a manufacturer of rolling stock, or trains, with production sites in three European countries. The company has seen declining profitability over the past years; however, they are currently in a very good position to bid for and win a big contract for regional trains for a Swiss national rail company. They have asked you advise to them on whether they should place a bid for the contract. Given InformationSelling price per train: €21.0 millionVariable costs per train:Material costs: €15.2 millionLabor costs: €3.9 millionFixed costs for the facility in Switzerland:Re-tooling investment: €16.0 millionAnnual fixed costs (20% of the investment): €3.2 million per yearDismantling costs: €2.0 millionProduction: 30 trains over 6 years (5 trains per year)Variable profit margin per train: €1.9 millionNow, let’s create an Income Statement for the entire project duration to calculate the total profit.Calculations1. Total Revenue:Revenue per train = €21.0 millionTotal revenue for 30 trains = 30 * €21.0 million = €630.0 million2. Total Costs:a. Variable Costs:Material costs for 30 trains = 30 * €15.2 million = €456.0 millionLabor costs for 30 trains = 30 * €3.9 million = €117.0 millionTotal variable costs = €456.0 million + €117.0 million = €573.0 millionb. Fixed Costs:Re-tooling investment = €16.0 million (one-time)Fixed costs per year for 6 years = 6 * €3.2 million = €19.2 millionDismantling costs = €2.0 million (one-time)Total fixed costs = €16.0 million + €19.2 million + €2.0 million = €37.2 million3. Total Costs (Variable + Fixed Costs):Total costs = €573.0 million + €37.2 million = €610.2 million4. Profit:Total Revenue = €630.0 millionTotal Costs = €610.2 millionTotal Profit = €630.0 million - €610.2 million = €19.8 million5. Profit Margin:Profit Margin = (Total Profit / Total Revenue) * 100 = (€19.8 million / €630.0 million) * 100 = 3.1%ResultThe calculated profit margin is 3.1%. However, the case specifies a minimum margin of 10%, which means that the current plan for production in Switzerland does not meet the profitability requirements.The company must therefore reduce costs or increase revenue to achieve the 10% profit margin.⚠️ We have simplified the case to illustrate the scheme. In the real case, other factors, such as the possibility of changing location, are also taken into account. Can you solve the entire case? Find out here! Key TakeawaysThe income statement summarizes a company's revenues and expenses over a specific period, using accrual accounting to record transactions when incurred.Key components include operating revenue, operating costs (COGS and SGA), gross profit, and net profit, which together inform financial health and performance.Financial ratios derived from the income statement, such as gross profit margin and net profit margin, are critical for analyzing profitability and operational efficiency.Variations in these margins can indicate underlying issues, such as changes in tax strategies or interest expenses, making the income statement essential for strategic decision-making in consulting and case interviews.

The cash flow statement is one of the three primary components of a company's financial report, alongside the balance sheet and the income statement. It provides detailed insights into a company's cash movements and tracks how liquid assets change over a specific period. Unlike the income statement, which records revenues and expenses as they are accounted, the cash flow statement only includes actual cash transactions. This clarity allows businesses to understand how much cash they are truly earning and spending, offering vital information about liquidity and financial stability. The Three Main Categories of Cash FlowCash flows are classified into three main categories: operating cash flow, investing cash flow, and financing cash flow. Each category provides insights into different financial aspects of a business and collectively paints a picture of its liquidity.Operating Cash Flow (CFO): Operating cash flow represents cash generated from a company’s core activities—producing and selling goods or services. It reveals whether the day-to-day operations generate enough funds to sustain the business.Investing Cash Flow (CFI): Investing cash flow reflects long-term investments, such as purchasing property, equipment, or other assets. This metric shows how much money the company is allocating to drive future growth or improve productivity.Financing Cash Flow (CFF): Financing cash flow includes activities related to funding the business, such as issuing or buying back bonds and stocks or paying dividends. It illustrates how the company raises capital or returns value to its shareholders. How are Cash Flow, Income Statement, and Balance Sheet Interrelated?Cash flow, the income statement, and the balance sheet are closely interconnected and influence each other.Deriving Operating Cash Flow from the Income StatementOperating cash flow is derived from the income statement, using the EBIT (Earnings Before Interest and Taxes) as the starting point. Specific adjustments are made to determine the actual cash flow generated from operating activities.First, non-cash expenses, such as depreciations, are considered. Depreciations reduce accounting profit but do not result in a real cash outflow, so they are added back to the EBIT.Additionally, cash-related items outside the EBIT are included. A typical example is taxes paid: although taxes are not part of the EBIT, they represent a real cash outflow and are therefore subtracted.Changes in working capital (net working capital) can also impact the operating cash flow. These include increases or decreases in inventory, receivables, or payables, which affect actual cash flows.These adjustments ensure that the operating cash flow reflects the liquid funds genuinely generated or used by the company's operating activities.The Balance Sheet as a Basis for Investment and Financing Cash FlowsTo calculate investment and financing cash flows, the balance sheets of the past two years are used.Investment Cash Flow: This can be observed on the asset side of the balance sheet. An increase in assets due to investments indicates cash outflows, while a decrease, such as reducing inventory, reflects cash inflows.Financing Cash Flow: This is derived from the liabilities side of the balance sheet. An increase in equity or liabilities suggests that the company received additional funds, such as through loans or issuing new shares.Ultimately, all three types of cash flows—operating, investment, and financing cash flows—culminate in a net change in the company’s cash position. This change is reflected in the balance sheet as the difference in cash balances between two fiscal years.In the next section, you’ll see an example of how the three types of cash flows can be calculated indirectly. Example: Indirect Calculation of the Three Cash Flow Types PositionAmount(Operating Income) EBIT$100,000Income Taxes Paid-$20,000Depreciation and Amortization$50,000Change in Inventory-$40,000Change in Accounts Receivable$10,000Change in Accounts Payable$20,000= Cash Flow from Operating Activities (CFO) $120,000 Purchase of Intangible Assets-$20,000Change in Property, Plant, and Equipment-$300,000Sale of Business Units$100,000= Cash Flow from Investing Activities (CFI) -$220,000 Dividends Paid-$20,000Interest Paid-$30,000Change in Long-Term Liabilities$130,000= Cash Flow from Financing Activities (CFF) $80,000 Net Change in Cash (CFO + CFI + CFF)-$20,000 This table illustrates how the three types of cash flows contribute to changes in cash. Although the company generated $120,000 from operations, significant investments (-$220,000) outweighed the inflows. Additional financing (+$80,000) reduced the cash decline to -$20,000. Cash Flows and Their Role in Valuing a CompanyCash flows play a crucial role in determining a company’s value, especially when it comes to "free cash flow". Free cash flow shows how much money a company has available to distribute to shareholders as dividends or interest payments without using funds needed for day-to-day operations. For investors, this is an essential metric as it reveals how profitable and financially stable a company truly is.A company’s value is often calculated based on its free cash flow using a method called "Discounted Cash Flow" (DCF). This involves estimating future cash flows and discounting them to their present value to determine how much the company is worth today.To calculate free cash flow, non-cash expenses like depreciations, which don’t represent actual cash outflows, are added back to the income statement figures. After that, all necessary investments required to keep the business running, such as working capital, short-term receivables and payables, and capital expenditures for things like equipment or real estate, are subtracted.The final figure provides a clear picture of the company’s potential to generate value and make payments to shareholders. Below is an example calculation to illustrate this. PositionAmount(Operating Income) EBIT$100,000Income Taxes Paid-$20,000Depreciation and Amortization$50,000Working Capital Changes-$10,000Investments (Intangible + Equipment)-$280,000= Free Cash Flow-$160,000 Practical Applications of Cash Flow Analysis in Case InterviewsA cash flow analysis is a common tool in case interviews to evaluate a company's financial health and guide strategic decisions. Candidates are expected to interpret different cash flow categories and derive practical recommendations. Below are four typical scenarios where the cash flow analysis can play a key role in case interviews:Assessing a Company's Financial StabilityA company must ensure it has enough funds to meet its short-term obligations. By analyzing the operating cash flow, you can determine if the business can sustain itself financially. A positive operating cash flow is a strong indicator of stability and short-term liquidity. Deciding on Investments in New ProjectsWhen evaluating a significant investment, such as building a new production facility, the free cash flow becomes a critical metric. It helps determine whether the company can finance the project without jeopardizing its liquidity. A sufficient free cash flow indicates that the business has the resources to support growth initiatives. Valuing an Acquisition or MergerIf a client is considering acquiring a company, a cash flow analysis can help estimate the target company's future value. The Discounted Cash Flow (DCF) method is a common valuation approach used to assess whether the acquisition price is justified and how the transaction might impact the cash flow. Analyzing Cash Conversion Efficiency for a Manufacturing BusinessFor a manufacturing company struggling to generate cash quickly, the Cash Conversion Cycle (CCC) is a key metric. A short CCC reflects operational efficiency and the ability to convert resources into cash quickly. A long CCC, however, highlights inefficiencies and areas for improvement. Key TakeawaysCash flows are crucial for assessing liquidity. A positive cash flow indicates at least short-term solvency.Cash flow comes from three main sources: operations, investments, and financing activities.Operating cash flow helps evaluate a company’s ability to sustain its daily operations.Investment cash flow provides insights into opportunities for future growth through investments.Financing cash flow shows how a company raises capital or returns it to shareholders, serving as a marker of financial strategy and capital structure.Practical use in case interviews: A cash flow analysis helps assess financial stability, investment potential, acquisition decisions, and the efficiency of working capital management.