A single 'profit' number hides a lot. That is why the income statement reports profit at several levels, each one stripping out a different kind of cost. Each layer tells you something the others do not.
Four levels of profit
| Level | What it still subtracts | Why people look at it |
|---|---|---|
| Gross profit | Cost of goods / services | The basic economics of what is sold |
| EBITDA | Also operating expenses (salaries, rent, marketing) | Operating performance before accounting and financing effects |
| EBIT | Also depreciation and amortisation | Operating profit of the business itself |
| Net profit | Also interest and tax | The bottom line available to shareholders |
Each level removes a different kind of cost.
Analysts often turn these levels into margins — the profit at each level as a percentage of revenue. Margins let you compare companies of very different sizes on equal terms.
Margin = (Profit at that level ÷ Revenue) × 100
Suppose ABC Manufacturing has revenue of ₹1,500 crore and a net profit of ₹90 crore. Its net margin is ₹90 ÷ ₹1,500 = 6%. Another company with the same 6% margin is earning the same profit on every rupee of sales, whatever its size.
Build an income statement
Change any input and watch the whole statement — and every margin — recalculate.
| Line item | ₹ crore |
|---|---|
| Revenue | 1,000 |
| Cost of goods / services | -400 |
| Gross profitRevenue − COGS | 600 |
| Operating expenses | -200 |
| EBITDAGross profit − Opex | 400 |
| Depreciation & amortisation | -100 |
| EBIT (operating profit)EBITDA − D&A | 300 |
| Interest | -50 |
| Profit before tax | 250 |
| Tax @ 25% | -62.5 |
| Net profit | 187.5 |
Gross margin
60%
EBITDA margin
40%
Operating margin
30%
Net margin
18.8%
- Gross margin shows pricing power and production efficiency.
- EBITDA margin shows how lean the core operations are.
- Net margin shows what is finally left for owners after everything.
A caution about EBITDA