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such as revenue from selling real estate or legal costs.Depreciation: The reduction in value of assets, such as outdated machinery.Interest: Costs of debt, which are listed on the balance sheet.Taxes: Taxes paid on EBT (Earnings Before Tax).💡Prep tip: Need to freshen up your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 belongs to one of the three financial statements in addition to the balance sheet and income statement. Cash flow statements show the inflow/outflow of cash. The key difference between a cash flow statement and an income statement is that while an item gets listed in the income statement as soon as it is accrued, the same item gets listed in the cash-flow statement only after the actual payment has happened.Cash flows can be segmented into three major categories:Operating cash flows are a result of the core business in which cash flows are directly generated by manufacturing or selling a product. These are necessary to keep the business operating.Investment cash flows are long-term investments into assets such as property or plants.Financing cash flows are a result of activities such as issuance and repurchase of bonds, equity, and dividends.Cash flow, balance sheet, and financial statement are interdependentThe income statement is used to derive the operating cash flow:In general, you start with EBIT. All included positions that have no actual influence on cash flows are subtracted. For example: to derive the earnings before interest and taxes (EBIT), depreciation is subtracted from the gross profit. Since depreciation is not actual cash flow, it has to be added again to get a true picture of a firm’s cash flow. Likewise, positions that are not included in EBIT, but result in changes in cash flow need to be added, e.g. taxes.The balance sheets from two consecutive years are used to derive the investment and financing cash flow:Determine the investment cash flow over the asset side of the balance sheet: If assets increase due to investments over the past year, cash-outflows are necessary to acquire them. Likewise, if assets such as inventory decrease, they result in cash inflows from sales.Use the financing side of the balance sheet to derive the financing cash flow. If equity or liabilities increase a cash inflow must have happened. Of course, you can buy assets immediately through debts meaning that the cash from getting credit is directly used for the asset. Consequently, cash flows possibly cancel each other out.The sum of all three cash flows (operating, investment and financing) is the final change in cash. You can find this change in the balance sheet as the difference in cash positions between the current and preceding year.Find below an example of how these three cash flow types can be indirectly calculated Cash flows are major inputs for company valuationsFree cash flow is another type of cash flow important for investors. It depicts the amount of cash that can flow to a company’s security holders in terms of dividends or interests without extracting necessary money for daily operations. Free cash flows are often used to determine the company value by applying discounting principles.Calculations can be done in several different ways. But the key idea remains the same: from a company’s income, add everything that has been subtracted during profit and loss calculation that has no real influence on the level of cash. Subtract everything that is needed as an investment to keep the business running at a current level. This is usually working capital, or current receivables, payables, and capital expenditure (e.g., investments in plants, property, and equipment), which have to be renewed. Key takeawaysCash flows are crucial to determine liquidity. Positive cash flows are a sign of at least short-term solvency.Cash flow emerges from operations, investing, and financing.Operating cash flows help to assess the company's ability to fund the ongoing business.Cash flow from investing helps to assess the possibilities of future growth through investments.