Revenues...
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)....
Earnings Before Interest and Taxes (EBIT)...
Net Income...
Free Cash Flow (FCF)...
Which is the most important for early-stage ventures? What should be the primary focus when constructing our financial models? It depends. All are important, but some are neglected more than others.
Top-line growth is obviously important to grow the business. EBITDA is considered to be a strong proxy for cash flow and profitability. EBIT serves as the actual operating income of the business and net income represents the actual profits. Clearly, all of these are important... but the problem is that all of these are derived 100% from the income statement.
When looking at these figures in isolation, it is almost impossible to determine the strength of the company's financial performance. To begin with, the balance sheet is not taken into consideration. Without observing the level of capital that is deployed, one cannot determine the relative strength of profitability. A company with $1,000 in profits that has $10,000 in capital is much different that a company with $1,000 in profits and $1,000,000 in capital. Capital structure, debt levels, cash, Capex, PP&E levels, etc. are arguably even more important to closely monitor than income statement data. Even more importantly, the cash flow statement is needed to calculate whether the company can meet its financial obligations and/or redeploy excess cash. FCF is often neglected for early-stage ventures, as pointed out by the readings and by Professor Zak. A company can have strong profitability and still become insolvent if it produces negative cash flow.
On a more technical note, you will likely want to build out a discounted cash flow (DCF) analysis within your financial models. Building a DCF will enable you to forecast company cash flows into the future, while simultaneously serving as a strong tool for valuation purposes. Below is the calculation you should use to arrive at FCF:
EBITDA – depreciation & amortization (D&A) = EBIT
EBIT * (1-tax rate) = net operating profit after taxes (NOPAT)
NOPAT + D&A +/- [change in CAPEX] +/- [change in Working Capital] = FCF
Also, here is an overly simplified DCF as an example:
Again, I am more than happy to provide additional info regarding financial modeling, discounted cash flow analysis or other valuation techniques. Please feel free to reach out in class or through email.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)....
Earnings Before Interest and Taxes (EBIT)...
Net Income...
Free Cash Flow (FCF)...
Which is the most important for early-stage ventures? What should be the primary focus when constructing our financial models? It depends. All are important, but some are neglected more than others.
Top-line growth is obviously important to grow the business. EBITDA is considered to be a strong proxy for cash flow and profitability. EBIT serves as the actual operating income of the business and net income represents the actual profits. Clearly, all of these are important... but the problem is that all of these are derived 100% from the income statement.
When looking at these figures in isolation, it is almost impossible to determine the strength of the company's financial performance. To begin with, the balance sheet is not taken into consideration. Without observing the level of capital that is deployed, one cannot determine the relative strength of profitability. A company with $1,000 in profits that has $10,000 in capital is much different that a company with $1,000 in profits and $1,000,000 in capital. Capital structure, debt levels, cash, Capex, PP&E levels, etc. are arguably even more important to closely monitor than income statement data. Even more importantly, the cash flow statement is needed to calculate whether the company can meet its financial obligations and/or redeploy excess cash. FCF is often neglected for early-stage ventures, as pointed out by the readings and by Professor Zak. A company can have strong profitability and still become insolvent if it produces negative cash flow.
On a more technical note, you will likely want to build out a discounted cash flow (DCF) analysis within your financial models. Building a DCF will enable you to forecast company cash flows into the future, while simultaneously serving as a strong tool for valuation purposes. Below is the calculation you should use to arrive at FCF:
EBITDA – depreciation & amortization (D&A) = EBIT
EBIT * (1-tax rate) = net operating profit after taxes (NOPAT)
NOPAT + D&A +/- [change in CAPEX] +/- [change in Working Capital] = FCF
Also, here is an overly simplified DCF as an example:
Again, I am more than happy to provide additional info regarding financial modeling, discounted cash flow analysis or other valuation techniques. Please feel free to reach out in class or through email.
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