Every business is ultimately a simple loop: sell something to customers for more than it costs you to provide it. What makes companies different is the detail inside that loop.
- Revenue is the total money collected from customers.
- Costs are what had to be spent to earn that revenue.
- Profit is what remains — and there are several levels of it.
The layers of profit
| Level | What it subtracts | Why people look at it |
|---|---|---|
| Gross profit | Cost of goods / services | Shows the basic economics of what is sold |
| EBITDA | Also operating expenses (salaries, marketing, rent) | Shows operating performance before accounting and financing effects |
| EBIT | Also depreciation and amortisation | Operating profit used to judge the business itself |
| Net profit | Also interest and tax | The bottom line available to shareholders |
Revenue − Costs = Profit (measured at several levels)
A company can look healthy at one level and unhealthy at another. Plenty of businesses earn a good gross profit but lose money once interest and tax are paid.
Build an income statement
Change any input and watch the whole statement — and every margin — recalculate.
1,000
400
200
100
50
25
| 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%
Notice how each layer subtracts a different kind of cost. A company can be profitable at the operating level yet lose money at the net level once interest and tax are paid.
Change the sliders above and watch the margins move. A company with high revenue but a thin net margin is far more fragile than it first appears.