Finance Formulas / January 26, 2018 / Iliana Williamson
An individual starts a business and incurs startup costs of $50,000. During the first year of operation, the business earns a profit of $75,000. If the individual had stayed at his previous job, he would have made $30,000. In this example, the accounting profit is $25,000, or $75,000 - $50,000. However, because the individual had the potential to earn income at another location while retaining the startup costs of the business, an economic loss of $5,000, or $25,000 - $30,000, is incurred. Although an accounting profit occurred, the individual would have made a larger profit if he had stayed in his previous position.
So how do you know if you’re spending the right amount? You need some numbers. First, you need to know how long the average customer sticks with you before they cancel their service. Because of course the longer a customer sticks with you, the more valuable they are.
EBITDA is a non-GAAP financial figure that measures a company's profitability before deductions that are considered somewhat superfluous to the business decision-making process. These deductions are interest, taxes, depreciation and amortization, all of which are not part of a company's operating costs and are therefore not associated with the maintenance and administration of a business on a day-to-day basis.
Earnings per share, the value of earnings per share of outstanding common stock, is a very important measure to assess a company's financial health. When reporting financial results, revenue and EPS are the two most commonly assessed metrics. EPS is reported on a company's income statement, and only public companies are required to report it. In their earnings reports, companies report both primary and diluted EPS, but the focus is generally on the more conservative diluted EPS measure. Dilutive EPS is considered a conservative metric because it indicates a worst-case scenario in terms of EPS.
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