🎓 From Revenue to Free Cash Flow: A Complete Guide
Master the key steps to understanding a company's financial journey.
Do you understand the path from revenue to free cash flow? 👀🐑
Here’s a complete guide covering everything you need to know, from revenue to free cash flow:
1. Revenue
This is the total amount of money a company earns from its normal business operations, such as selling products or services.
Revenue = number of units sold x average price per unit
2. Gross Profit
The profit a company makes after deducting the Cost of Goods Sold (COGS) from its revenue. Its the profitability of the company's core business operations, excluding overhead costs, taxes, interest, and other expenses.
Gross Profit = Revenue - COGS
3. Operating Income (EBIT)
EBIT (Earnings Before Interest and Taxes) represents the company’s profit from operations before considering non-operating expenses like interest and taxes.
Operating Income (EBIT) = Gross Profit - Operating Expenses
4. EBITDA
A measure of a company’s profitability that excludes interest, taxes, and non-cash expenses like depreciation and amortization.
EBITDA = Operating Income + Depreciation + Amortization
5. Adjusted EBITDA
Adjusted EBITDA further adjusts EBITDA to exclude non-recurring or irregular expenses (e.g., restructuring costs, litigation costs, or one-time gains).
Adjusted EBITDA = EBITDA ± Adjustments for Non-Recurring Items
6. Pre-tax Income
Pre-tax income is the income a company earns before income taxes. It reflects the profit remaining after all operating and interest expenses have been deducted from revenue.
Pre-Tax Income = Operating Income (EBIT) − Interest Expense
7. Net Income
Net income is the total profit of a company after deducting all expenses, including operating costs, interest, taxes, and non-recurring items, from total revenue.
8. Operating Cash Flow
Operating cash flow is the cash generated from a company’s core business operations. It indicates the company's ability to produce cash to fund operations and pay debts.
Operating Cash Flow = Net Income ± Changes in Working Capital
9. Free Cash Flow
Free cash flow is the cash a company generates after capital expenditures, representing funds available for shareholder distribution, debt repayment, and reinvestment.
Free Cash Flow = Operating Cash Flow - Capital Expenditures
Summary
1. Revenue
2. Gross Profit = Revenue - COGS
3. Operating Income (EBIT) = Gross Profit - Operating Expenses
4. EBITDA = Operating Income + Depreciation + Amortization
5. Adjusted EBITDA = EBITDA ± Adjustments for Non-Recurring Items
6. Pre-Tax Income = EBIT - Interest Expense
7. Net Income = Pre-Tax Income - Taxes
8. Operating Cash Flow = Net Income ± Changes in Working Capital
9. Free Cash Flow = Operating Cash Flow - CapEx
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Disclaimer:
The information and opinions provided in this article are for informational and educational purposes only and should not be considered as investment advice or a recommendation to buy, sell, or hold any financial product, security, or asset. The Future Investors does not provide personalized investment advice and is not a licensed financial advisor. Always do your own research before making any investment decisions and consult with a qualified financial professional before making any investment decisions. Please consult the general disclaimer for more details.