There are several types of profit — margin, taxable, operating, and net. For each of these types of profit, there is a separate definition of profitability and separately added EBITDA.

With the help of all these components, you can calculate the financial condition of the company. So, let us dwell on these terms in more detail to better understand if your venture is profitable or not.

Income and Profit


To put it short, income is an increase in economic opportunities for a company, and expenses are a decrease in them. Profit is the difference between income and expenses.

For example, a company in Nigeria enters into an agreement with a counterparty for the supply of its goods in the amount of N 2,000,000 (income). But they need to incur delivery costs — production of goods, logistics costs, warehouse storage in the amount of N 400,000 (costs). So, the company's profit is N 1,600,000.

Types of Expenses


Just like in personal finances, it is necessary to understand the types of expenses of a company:

  • Fixed expenses — the cost of constant payment for additional services at work, rent of premises, wages.

  • Variable costs are closely related to income. That is, the higher the income, the higher the variable costs. For example, it can be the payment for gasoline for the transportation of orders, additional materials for the manufacture of a large volume of goods for counterparties.

It does not matter if you run a company or work as a freelancer, knowing expenses incurred in the process of carrying out your activity is crucial.

Let’s say, you are a Forextime trader. To carry out your forex trading activity, you need to pay for the services of a broker and other traders (applicable if you are working with copy trading).

Luckily, the MetaTrader 4 software is provided free of charge, while there are also plenty of free educational materials. But do not forget to include the cost of the Internet, electricity, the hardware you have acquired on the list of expenses.

How to Calculate a Profit


Profit margin is the difference between income and variable costs. That is, it is profit without any fixed costs. This is practically impossible since the company has a staff to whom it must pay wages.

The indicator of the marginal profit is calculated to assess the commercial capabilities of the sales department, for example. With its help, it is realistic to assess how profitable the deal was.

Operating profit is the profit from the main activity, and it shows the efficiency of the business as a whole. It is calculated by subtracting fixed costs from the marginal profit.

Taxable income is the difference between other income and expenses. Other income can be considered any income that does not correspond to the activities of the company. This can be the sale of leftover raw materials for production.

Net income is the difference between profit before tax and the value of taxes. These funds remain at the disposal of the business owners. The net profit can be calculated as follows:

Net income = Income — Variable costs — Fixed costs + Other income — other expenses — tax

EBITDA is earnings before interest, taxes, and depreciation. To determine this profit, it is necessary to add the sum of the bank interest and the accrued depreciation to the taxable profit. In case the company does not use depreciated assets and does not pay interest to banks, EBITDA is equal to taxable profit.

How to Calculate Profitability


An increase in net profit is not always an indicator of an increase in profitability. For example, income can double, and the percentage of net profit can increase by only 2%. That is, despite the growth in funds, the company's profitability declined.

When comparing income between different quarters or other periods, it is crucial to pay attention not only to the overall performance but also the profitability. The challenge for profitability is to grow or meet plans. If in the end, the plan was not fulfilled either in terms of net profit or in terms of profitability, it is necessary to find out what contributed to the decrease in profits and to analyze the comparison of income and expenses.