Revenue to profit conversion
Revenue to profit conversion is an approach that graphically depicts the path from Revenue to Net income by clearing the financial flow from the various components. In the intermediate stages, we get indicators such as Gross Profit, EBITDA, EBIT (and margins).
This indicator helps investors quickly understand how efficient the business is at the moment, how much the company earns for each dollar of revenue, what it spends the most on, and where the most opportunities for business optimization are.
To calculate Revenue to profit conversion, we need to use some formulas that relate Revenue, Cost of Sales, Expenses, Interest, Taxes, Depreciation, Amortisation and Net Profit. Here are some examples:
- Gross Profit = Total Revenue - Cost of Sales
- Gross Profit Margin = Gross Profit / Revenue
- Net Profit = Gross Profit - Expenses
- Net Profit Margin = Net Profit / Revenue
These formulas show how much profit a business makes after deducting different types of costs from its revenue. For example, Gross Profit Margin shows how much profit a business makes for each dollar of revenue after paying for the variable costs of making or providing its products or services. Net Profit Margin shows how much profit a business makes for each dollar of revenue after paying for both variable and fixed costs.
Revenue to profit conversion can also be expressed as a percentage or a ratio. For example, if a business has a revenue of $100,000 and a net profit of $15,000, its Revenue to profit conversion is 15% or 0.15. This means that for every dollar of revenue, the business keeps 15% as net profit.
Revenue to profit conversion can vary depending on the type and size of the business, the industry it operates in, and the market conditions. Generally, a higher Revenue to profit conversion indicates a more profitable and efficient business. However, it is also important to consider other factors such as growth potential, competitive advantage, customer satisfaction and social responsibility when evaluating a business performance.