Now that you’ve learned about different profit metrics like Gross Profit EBITDA and Net Income let’s compare them to see what they reveal about companies and their profitability 📊

Gross Profit gives you a “baseline” of how much profit a business could generate if they cut all other costs besides Cost of Goods Sold 💡

It’s harder to reduce a business’ COGS than to reduce operating expenses, since COGS, and therefore Gross Profit, is often determined by the fundamental nature of the business 🏭

For example, the T-shirt company can easily fire its marketing team to decrease operating expenses, but it’s much harder to decrease the cost of the fabric and ink used to make shirts ✂️

Investors have differing opinions on EBITDA 🤔

For example, Warren Buffet famously does not invest in any companies that even talk about EBITDA 🚫

The main advantage of using EBITDA over Net Income is that it gives a better view of a business’ ability to generate CASH from its core operations 💰

This is because EBITDA ignores non-cash expenses like Depreciation and Amortization, as well as expenses that can fluctuate over time, like taxes and interest 🔍

However, the con of EBITDA is that the expenses it ignores can be quite big 📉

A business with large interest expenses that negatively affect its real profitability wouldn’t reflect those costs in its EBITDA ⚖️

Meanwhile, Net Income gives a complete picture of a business’ profitability, since it doesn’t ignore ANY expenses – it’s called the “bottom line” for a reason 🎯

However, Net Income can be influenced by one-time events, for example a large tax break or a big interest payment, and therefore should be viewed in context of other revenue and profit metrics 🧐