Finance & Investing Language
Finance & Investing Language
Numbers tell stories. You need to know how to read them.
The Three Financial Statements
- Income Statement (P&L): Revenue to Gross Profit to Operating Income to Net Income
- Balance Sheet: Assets = Liabilities + Equity (point in time)
- Cash Flow Statement: Operating + Investing + Financing cash flows
A company can show accounting profit and run out of cash simultaneously. Cash flow is the truth.
Gross vs. Net Margin
Gross margin = what you keep after producing the product.
Net margin = what you keep after everything (salaries, rent, taxes, interest).
A SaaS (Software as a Service) company with 70%+ gross margin has pricing power. A restaurant at 10% gross margin has almost no room for error.
EBITDA as a Valuation Base
Most private company deals use EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortisation) multiples:
- Small businesses: 3-5x EBITDA
- Mid-market: 6-10x EBITDA
- High-growth SaaS (Software as a Service): 15-30x ARR (Annual Recurring Revenue, revenue-based)
An operator knowing their EBITDA multiple knows their exit price.
Reading the P/E Ratio
P/E (Price-to-Earnings) of 20 means investors pay $20 for every $1 of current earnings — expecting future growth. High P/E = high expectations. When growth disappoints, high P/E stocks fall hard.
Leverage: Double-Edged
Debt amplifies returns when things go well and accelerates destruction when they don't. Private equity firms buy companies at 5-8x EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortisation) using 60-70% debt. If EBITDA grows, returns multiply. If it shrinks, lenders call the loan.