Underlying Profit

Underlying Profit
See also
Expanded accounting equation Functional budget Production concept Solvency ratios Du Pont formula Commercial facility Net income margin Activity ratios Contribution margin ratio

Underlying Profit is operating profit adjusted for exceptional items like restructuring costs.

Underlying earnings the figure excluding any one-off items such as the sale of land that is not part of the company's normal business.

Underlying EBIT

Underlying EBIT (Earnings Before Interest and Taxes) is profit from operations, excluding the effect of exceptional items. We also stand out:

• Underlying EBIT margin is profit from operations, excluding the effect of exceptional items before taxation and excluding third party production, divided by revenue from production.
• Underlying EBITDAR represents underlying earnings before income tax expense, depreciation, amortisation, non-cancellable aircraft operating lease rentals and net finance costs.

Profits and Profit Maximization

As profits play a significant role in the firm's ability to provide dividends, attract capital, maintain growth, engage in research and development, provide good service to its customers, and possibly even survive, we will make the assumption that its main goal is to make as much profit as possible. Other related and competing objectives will fall into their proper place after we examine the basic theoretical construct underlying profit maximization. The profit maximization assumption seems intuitively reasonable and analytically productive.

Impact of Underlying Profit

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) helps measure the company's underlying profit, banks and other sources of capital tend to use EBITDA when determining how much money they can lend. These institutions measure that amount in turns; one turn is equal to the business's EBITDA. For example, if the business is generating $3 million in EBITDA, one turn of EBITDA is $3 million. If a company is being sold for $15 million, the Buyer needs to come up with five turns of EBITDA.

References

• Birt J., (ed.) (2019), Accounting: Business Reporting for Decision Making, John Wilej & Sons Australia, Ltd, Australia.
• Briscoe S., Fuller J., (2007), Harriman's Financial Dictionary: Over 2,600 Essential Financial Terms, Harriman House Ltd., Hampshire.
• CFA Institute, (2016), CFA Program Curriculum 2017 Level II, John Wiley & Sons, New York.
• Henderson S., (ed.) (2015), Issues in Financial Accounting, Pearson Australia, Australia.
• Mahanty A. K., (2014) Intermediate Microeconomics with Applications, Academic Pres, Inc., New York.
• Rice A., (2015), Accounts Demystified: The Astonishingly Simple Guide To Accounting, Pearson Education Limited, Edinburgh.
• Snow B., (2011), Mergers and Acquisitions For Dummies, Wiley Publishing, Inc., Hoboken.

Author: Katarzyna Siedlarczyk