Question

1. Discuss differences between the following pros and cons of each to measure profit: a. Gross profit b. Operating income (EBIT) c. Net Income d. EBITDA e. Adjusted EBITDA f. Cash from Operations g. Free Cash Flow

Answer 1

Term	Description & Difference	Pro	Cons
Gross Profit	Revenue - Cost of Goods sold	Gives total profit of the company that is earned from its principal busniess activity	ignore other expenses/costs and don’t provide actual profit
Operating Income	It represents Income from Operations	Gives actual profit of the company that is earned from its principal busniess activity taking into account all costs.	Ignore non-cash expenses like depreciation.
Net Income	It represents Income after deducting all expenses, taxes etc. carried over to equity	Gives actual profit after all expenses.	Consider non-cash and provisional expense also like depreciation.
EBITDA	Operating Income + Interest + Taxes + Depreciation and Amortisation	Used for taking operating decision	Ignore financing decisions
Adjusted EBITDA	It is EBITDA as a % of Revenue of the company	Used for comparing related company data.	Ignore the fact that on the company can't earn same % of EBITDA on each level of scale.
Cash From Operations	As the name suggest cash generated from operations, it will be Operating income plus non-cash expenses like depreciation. Also finance and investment related income and expenses to be ignored. For instance Interest Paid/ Received etc.	Gives actual cash generated from operations also depicts movement in working capital etc.	Ignore overall cash receipt and payment and don’t provide information of cash available for use.
Free Cash Flow	Cash From Operations (-) Cash used for Capex	Provide information of free cash available for future decision