Framework for Understanding Results
tl;dr: An analysis framework to understand what contributes to company performance.
Whether you are comparing from quarter to quarter, year to year, projection to actual, or standalone to PF this is a useful framework to help you understand what is driving the results. Let's use a simple example with Revenue and EBITDA. For example:
Base Results (Whether prior period, projections, or standalone)
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Revenue: $100
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EBITDA: $50
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EBITDA Margin: 50.0%
Comparison Results (Whether current period, actual results, or PF)
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Revenue: $120
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EBITDA: $65
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EBITDA Margin: 54.2%
How can we dissect these results to get some insights? Well, some obvious numbers that pop out are revenue growth is 20%, EBITDA margin expanded by ~417 bps and EBITDA growth is 30% (outpaces revenue growth due to margin expansion). But what else can we learn?
Let's try to understand the drivers of EBITDA by bifurcating the components of growth. There are two primary factors contributing to the EBITDA growth: margin expansion and topline growth.
Topline Growth Impact
First, let's neutralize the effect of the Margin expansion to understand the impact of topline growth. So if you had achieved revenue growth of 20%, but maintained the same EBITDA margin, what would your EBITDA have been?
EBITDA (@50%) = $120 x 50% = $60. So we can see that due to revenue growth alone, if EBITDA margins were constant, EBITDA would have grown $10 (or 67% of the total $15 growth). Another way to get here: EBITDA of $50% x 20% growth.
Margin Impact
It's clear that the last $5 comes from the margin expansion, but let's back check that. EBITDA expands 417 bps on $120 of revenue, 4.17% x $120 = $5.
In this case, you can confidently say that the EBITDA growth is 2/3 attributable to topline growth and 1/3 attributable to margin expansion.
Why This Matters
Is this analysis super basic? Yes. But you can carry the philosophy to more complicated concepts like EPS/LFCF accretion (what % is attributable to lower cost of capital for debt financing, synergies, multiple arbitrage including target growth rate/EBITDA contribution). The idea is to systematically neutralize the individual components to reduce noise and see what is actually driving the changes.
If you have more information (KPIs, SSS, unit economics or segment information) you can take this even further. Ex. How much of revenue growth is from pricing increases? How much of revenue growth is from increased sales volume? How much of revenue growth is from different divisions/segments? How much is from expanding the operations footprint?
This type of analysis can aid with a "what-if" type of analysis in M&A situations. Ex. What synergies would be needed to make this deal accretion neutral? What's the maximum price we can pay (multiple arbitrage) that would make this deal accretion neutral? What would happen to accretion if we changed the deal's financing structure?
Just another useful tool to keep in the belt. Happy banking.
This framework ignores the relative impacts of price vs volume. For example, I can silmutaneously grow top line and expand EBITDA margin by merely increasing price per unit (assuming favorable elasticity). Under your approach, you might mistakenly attribute some of this margin expansion to cost savings. If you’re going to do this, you might want to consider separately isolating the impacts to Gross Margin and EBITDA Margin, and also look at what is going on in your Revenue rate (revenue / volume) over time (assuming volumes are disclosed).
Nice post. To put the concept in more mathematical terms, this is the idea of a partial derivative
EBITDA = Revenue x EBITDA Margin E = R x EM dE/dR = EM —> dE = EM x dR dE/dEM = R —> dE = R x dEM dE = EM x dR + R x dEM
I'm not following how dE becomes EM x dR + R x dEM when the previous two lines result in dE being equal to EM x dR and R x dEM.
Last line is with respect to both variables, ie sum of partial derivatives
Ah! Got it. Thank you- I will SB you when I regain my ability to after either giving or receiving too much MS in a different thread.
Ut est in illo. Fuga ea vero perferendis.
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