Module 2: Revenue, Income Statements, and Profitability

How do I calculate year-over-year revenue growth?

I'd take this year's revenue minus last year's revenue, divide by last year's revenue, and multiply by 100.

Revenue rose from $80M to $100M. What is growth?

25%: the $20M increase divided by the original $80M.

Sales rose from $150M to $165M. How much did they rise in dollars?

$15 million. That is a 10% increase.

What are the two main drivers of revenue growth?

Selling more units or services, and charging higher average prices.

Sales volume rises 10% and prices stay flat. What happens to revenue?

Revenue rises about 10%, assuming the product mix stays the same.

Prices rise 10%, but units sold fall 10%. Does revenue stay flat?

No. Revenue falls 1% because 1.10 times 0.90 equals 0.99.

Revenue rose, but customer traffic fell. What might explain it?

Revenue could still increase if the company raised prices, customers spent more per visit, or they bought more expensive products.

What is organic revenue growth?

Growth from the existing business, excluding the impact of acquisitions.

Why can an acquisition make reported growth misleading?

Because the acquired company's revenue gets added to the total, making growth look stronger even if the original business barely grew.

What does pro forma revenue help you compare after an acquisition?

It adjusts the previous year's revenue to include the acquired business, so I can compare revenue growth more accurately.

Can revenue growth alone tell me if a company has pricing power?

No. I'd look at whether the company can raise prices without losing too many customers or sales, and whether those higher prices are sustainable.

Is faster revenue growth automatically good for bondholders?

No. I'd check whether it leads to stronger profits and cash flow without taking on too much additional debt.

What is cost of goods sold, or cost of services?

The direct costs of delivering what a company sells, such as materials or service labor.

How do I calculate gross profit?

Revenue minus the direct costs of goods or services sold.

Revenue is $200M and direct costs are $130M. Gross profit?

$70 million: $200 million minus $130 million.

How do I calculate gross margin?

Gross profit divided by revenue, expressed as a percentage.

Revenue is $100M and gross profit is $40M. Gross margin?

40%: $40 million divided by $100 million.

Gross margin falls from 40% to 35%. How much did it fall?

Five percentage points, not 5%.

Revenue rises, but gross profit stays flat. What happens to gross margin?

It falls because gross profit is now a smaller share of revenue.

What could cause gross margin to decline?

Gross margin can decline because of higher direct costs, like materials and labor; weaker pricing from discounts; lower utilization, where fixed production costs are spread over fewer units; or a shift toward lower-margin products.

Costs rise faster than prices. What usually happens to gross margin?

Gross margin usually declines because the company’s costs are increasing faster than what it charges customers, leaving less gross profit from each dollar of revenue. Unless the company can offset those increases by reducing other direct costs or improving efficiency.

What do I subtract from gross profit to get operating income?

Operating expenses like selling, general, and administrative costs; exact line items vary.

How do I calculate operating margin?

Operating income divided by revenue.

Operating income is $14M on $100M of revenue. Operating margin?

14%: $14 million divided by $100 million.

What does EBITDA stand for?

Earnings before interest, taxes, depreciation, and amortization.

Why do credit analysts look at EBITDA?

It helps compare operating earnings against debt and interest, but it is not cash flow.

What is the difference between EBIT and EBITDA?

EBIT includes depreciation and amortization expense; EBITDA adds them back.

EBIT is $30M and D&A is $10M. What is EBITDA?

$40 million, assuming the D&A expense is included in EBIT.

Why do we add depreciation back when calculating EBITDA?

It reduced accounting profit but is not a cash payment in that period.

Revenue is $120M and EBITDA is $18M. EBITDA margin?

15%: $18 million divided by $120 million.

How is operating income different from net income?

Net income also reflects items below operating income, including interest and taxes.

EBIT is $20M, interest $8M, taxes $3M. Net income?

$9 million, assuming no other income or expenses.

How can EBITDA rise while net income falls?

Interest, depreciation, taxes, or other below-EBITDA expenses may have increased.

What is adjusted EBITDA?

EBITDA modified for selected items. I’d check whether the add-backs are truly unusual.

Can I treat EBITDA as cash available to repay debt?

No. It leaves out cash interest, taxes, working capital, and capital spending.

What is operating leverage in simple terms?

Fixed costs can make profits move more sharply than sales.

Why might a high-fixed-cost business suffer in a sales downturn?

Its sales fall, but many costs do not fall quickly, so profit gets squeezed.

Two companies lose 10% of sales. Which may lose more profit?

The one with more fixed costs and less ability to reduce expenses.

Gross margin falls but operating margin rises. How is that possible?

Other operating expenses fell enough relative to sales to offset the weaker gross margin.

Revenue rises, but EBITDA falls. What would I check first?

Pricing, sales mix, direct costs, and operating expenses to find the source of pressure.

How can selling more products still hurt profitability?

If the extra sales carry low margins or need too much added spending.

What are normalized earnings?

An estimate of earnings under more typical conditions, without unusual boosts or setbacks.

Why might last year be a poor starting point for a forecast?

It may include a one-time event, acquisition effects, or unusually strong or weak demand.

Should I automatically add back a management-labeled one-time cost?

No. I’d check whether it really is unusual and whether similar costs keep recurring.

One year has higher margins than another. Which is the normal year?

I can’t tell from margins alone. I’d investigate demand, costs, mix, and unusual events.