Profitability Framework
Profit Decomposition Tree
Decomposes profit into revenue and cost branches, then systematically drills down to isolate the root cause of declining or below-benchmark profitability.
Tree
Revenue = Price × Volume
Variable Costs
Fixed Costs
COGS vs SG&A vs D&A
Mix & Rate analysis
When to use
The most common case type — "Our profits are down 30%, help us find why."
DCF Valuation
Discounted Cash Flow Analysis
Values a business or project by discounting projected free cash flows at the weighted average cost of capital (WACC), reflecting the time value of money.
Key Inputs
Revenue Forecast
EBIT Margins
Capex & D&A
Working Capital Changes
WACC
Terminal Value
When to use
M&A, project investment decisions, startup valuation, or PE buyout cases.
Break-even Analysis
Volume–Cost–Profit Threshold
Determines the sales volume at which total revenues equal total costs — below this, the business loses money; above it, it profits.
Formula
BE = Fixed Costs ÷ Contribution Margin
Contribution = Price − Variable Cost
Margin of Safety
When to use
New product launch, pricing decisions, or "should we enter this market?" feasibility checks.
ROCE / ROIC
Capital Efficiency Metrics
Measures how effectively a company converts invested capital into operating profit. ROIC above WACC signals value creation; below destroys it.
Components
NOPAT (Net Operating Profit After Tax)
Invested Capital
WACC comparison
EVA (Economic Value Added)
When to use
Capital allocation decisions, PE screening, or comparing capital intensity across business units.
DuPont Analysis
ROE Decomposition
Breaks Return on Equity into three or five components, revealing whether ROE is driven by profitability, asset efficiency, or financial leverage — each implying a different strategic intervention.
3-Factor Model
Net Profit Margin
Asset Turnover
Equity Multiplier (Leverage)
When to use
When two firms have the same ROE but very different strategies, or when diagnosing underperformance vs peers.
Working Capital Analysis
Cash Conversion Cycle
Measures how efficiently a company manages the cash tied up between paying for inputs and receiving payment from customers — critical for liquidity-stressed businesses.
Components
Days Sales Outstanding (DSO)
Days Inventory Outstanding (DIO)
Days Payable Outstanding (DPO)
CCC = DSO + DIO − DPO
When to use
Turnaround, cash flow improvement mandates, or supply chain finance optimization.
IRR & NPV
Investment Return Criteria
Net Present Value measures absolute value creation; Internal Rate of Return measures the yield of a project. Together they inform go/no-go investment decisions.
Decision Rules
NPV > 0 → invest
IRR > Hurdle Rate → invest
Payback Period
Sensitivity Analysis
When to use
Capex decisions, new plant, technology investment, or any multi-period cash outflow project.
Trading Comps
Comparable Company Analysis
Values a business using multiples derived from publicly traded peers. Provides a market-anchored sanity check alongside DCF intrinsic value.
Common Multiples
EV/EBITDA
EV/Revenue
P/E
P/Book
EV/EBIT
When to use
M&A valuation, IPO pricing, or benchmarking a company's value versus sector peers.
Unit Economics
Per-Customer Profitability
Analyses the economics at the level of a single customer or transaction, establishing whether the business model is fundamentally viable before scaling.
Metrics
Customer Acquisition Cost (CAC)
Lifetime Value (LTV)
LTV:CAC Ratio (>3x = healthy)
Payback Period
Contribution Margin per Unit
When to use
Startup/scale-up cases, subscription businesses, or evaluating whether to expand a customer segment.
Sensitivity Analysis
Model Stress-Testing
Tests how the output of a financial model (NPV, EBITDA, EPS) changes as key assumptions are varied, quantifying uncertainty and identifying the critical drivers.
Techniques
One-way sensitivity table
Two-way data table
Tornado chart
Monte Carlo simulation
Bull/Base/Bear scenarios
When to use
Any investment decision — always pair with DCF or NPV to communicate the range of outcomes to stakeholders.
