This may sound basic to some people, but it would be good if someone clarified this…
What is the relationship between all 5 terms? They all seem to be used interchangably for a company’s indicator for ‘earnings’ (btw add ‘earnings’ to the list as well!), but I’m pretty sure they all mean different things…
By this basic question I suspect I’ve revealed how little I understand FRA…
Hi @policedog, I don’t think there is a basic or non basic question at all! They are all accepted with open arms here 🙂
As @tacheman mentioned, generally Revenue = sales = turnover. All different ways to say the same things. There are some industries that have a different industry-specific revenue definitions (+ other technicalities), but for our purposes they are all the same.
As you rightly pointed out, earnings is a generic term that indicate profitability. However, it needs to be more specific to know which term it means.
To illustrate the differences, let’s briefly walk through the structure of a simple, general income statement:
- We start at the “top” with revenue/sales/turnover
- subtract cost of goods sold (COGS), to get gross profit
- then subtract operating expenses (SG&A, depreciation, amortization, restructuring, and other operating expenses) from gross profit to get operating income (a.k.a. earnings before interest and taxes, EBIT). This shows the underlying profitability of the business, excluding impact of capital structure and taxation
- To obtain net income (overall profitability of the company), you subtract interest expenses and/or add interest income, and subtract income tax expenses from EBIT. Occasionally, there needs to be adjustment for share of profit/loss for minority interest. This is the “bottom line” of an income statement.
EBITDA is not a standard (or required) income statement item (i.e. a non-GAAP measure), but it is basically adding back the depreciation and amortisation expenses to EBIT (hence EBITDA). It is usually used to analyse and compare core profitability between companies and industries because it eliminates the effects of financing and accounting decisions. Note that EBITDA is not a reflection of a company’s ability generate cash and should not be used interchangeably with the term “cash flow”.
Hope this helps @policedog!
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