Income Statement & Profitability

"We made a profit" means nothing unless you say which profit: gross, operating, EBITDA or net? Reading the income statement step by step shows where profit erodes.

Which tool for which question?

• Financial Health Analysis (Balance Sheet and Income Statement Ratios): Calculates liquidity, profitability, leverage, debt service and efficiency ratios from the key balance sheet and income statement items on one screen.
• Profitability Ratios Calculator (ROE, ROA, Net Margin, DuPont): Calculates net profit margin, ROA, ROE, asset turnover and the equity multiplier from net profit, revenue, assets and equity, and breaks ROE down with DuPont.
• EBITDA Calculator: Gross Profit, Operating Profit and Net Margin: Starting from gross sales, calculates net sales, gross profit, operating profit (EBIT), EBITDA, profit before tax and net profit, with the margin at each level, in income statement order.
• Cost of Goods Sold (COGS) Calculator and Gross Profit: Calculates cost of goods sold (COGS), gross profit on sales and inventory turnover from opening inventory, purchases, purchase returns, purchase costs and closing inventory.
• Budget Variance Analysis Calculator (Budget vs Actual): Compares budgeted and actual revenue and costs to calculate revenue, cost and profit variances in amount and percent, plus sales price and volume variances when units are entered.
• Free Cash Flow (FCF) Calculator: FCFF and FCFE: Calculates free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) from operating profit, depreciation, capital expenditure and the change in working capital.

How the calculation works

The income statement reads like a waterfall:

• Gross profit = net sales − cost of goods sold (COGS). COGS = opening inventory + purchases − closing inventory.
• Operating profit = gross profit − operating expenses.
• EBITDA = earnings before interest, depreciation and tax; it shows profit from core operations independent of financing structure and depreciation policy.
• Net profit = operating profit − interest and other expenses − tax.
• Profit at each stage divided by sales gives the corresponding margin.

Budget variance analysis compares actual figures with the budget; free cash flow (FCF) shows whether profit turns into cash.

Things to watch

• Profit and cash are not the same; a profitable business can face a cash squeeze through slow collections.
• EBITDA excludes debt repayment and capital expenditure; it is not a sufficient measure alone.
• Compare margins with similar businesses in the same sector.