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7 Faces of Profits

In: English and Literature

Submitted By writeanubha
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7 FACES OF PROFITS

It’s that time of the year when quarterly reports flood mailboxes and dailies, and the words ‘earnings’ and ‘profit’ jump out from all over. But which profit should you consider to evaluate a company? What is the utility of profitability measures? Here’s a guide to understanding profits.

Gross Profit

What is it? It is the amount earned from sale of products after deducting production costs.

What it does: Signals efficiency with which a company is making money. Indicates how much mark-up a company can generate on its sales.

Other clues: A company with rising gross profit means it can command premium prices. This also implies cost efficiency, making the company highly competitive.

Black spots: Works as a primary indicator. Gross profit is similar to an incomplete story. To know more about a company, you have to read other signs.

Ebitda

What is it? It means earnings (or profit) before interest, taxes, depreciation and amortisation. It is calculated by subtracting operating, general, administrative and marketing expenses from gross profits.

What it does : Measures profitability. Say, you are having trouble deciding between companies, it is the best tool to compare them because it weeds out the effects of financing and accounting decisions.

Other clues: You can also compare sectors.

Black spots: Ebitda is not a good measure of cash flows. Companies may use it to dress up earnings.

Ebit, or operating profit

What is it? Ebit is earnings before interest and taxes. It is calculated by deducting depreciation and amortisation charges from Ebitda.

What it does: Measures a company’s earning capacity. An effective comparison tool. Examines performance of companies by negating the effects of financing and taxes. It is useful for shareholders and creditors.

Black spots: Suffers from similar problems as…...

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