The quality of profit is measured by the ratio of net cash inflow from operations divided by earnings before interest and taxes (EBIT). This indicates the amount of profit received in cash terms during the year.
Cash is the fuel that enables your business to survive and allows you to grow. This measure combines cash and operational profit in such a way that you can track your sustainability along with your cash position. You also get another view of your collection efficiency, making sure you collect money for all that work you’ve done.
In addition, it filters out extraordinary items and debt so you’re not lulled into thinking that because you have cash in the bank everything’s. You may be living on asset sales or your line of credit while the business deteriorates only to have a nasty surprise when it’s too late. Growth consumes capital, and especially in a high-growth situation you may outgrow your own capital base. Once the growth train picks up a head of steam, being surprised by the cash crunch is more than an inconvenience; you could get completely derailed.
Quality of Profits = Net Cash flows from Operating Activities
Operating profits
The quality of profit is measured by the ratio of net cash inflow from operations divided by earnings before interest and taxes (EBIT). This indicates the amount of profit received in cash terms during the year and also ‘Quality of profit’ ratio is used to measures the company’s health.
Cash is the fuel that enables your business to survive and allows you to grow. This measure combines cash and operational profit in such a way that you can track your sustainability along with your cash position. You also get another view of your collection efficiency, making sure you collect money for all that work you’ve done.
Quality of profit gives a much clearer view of the real position of a company and helps you determine if the company is healthy enough to undertake some significant initiative. Strategic decisions, especially those regarding investments, can be made from a much more solid foundation. Any major new effort has plenty of inherent risk, and knowing what to prioritize and fix first mitigates that risk.
Showing the quality of profit measurement to a buyer, banker or investor will help them fully understand health and value of your company.
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