Single step and multi step
Detailed P&L analysis calculates several profit metrics beyond profit before tax and net profit. Most companies present a single-step P&L: all incomes added, all expenses subtracted, profit before tax at the bottom. Some present a multi-step statement; Bharti Airtel computes operating profit before taxes, depreciation and non-operating items, EBITDA, and reduces other expenses from it. Even where a company presents a single-step statement, analysts convert it into multi-step form for analysis. The syllabus's redrawn Bharti statement uses positive signs for income and negative for expenditure.
Revenue 8,07,802 plus other operating income 2,912 gives total revenue 8,10,714. Network operating expenses (2,23,900), access charges (93,521), licence fee and spectrum charges (69,426), employee benefit expenses (37,975), sales and marketing (41,277), other expenses (83,514). EBITDA 2,61,101, down from 3,03,279. Depreciation and amortisation (2,13,475) gives EBIT 47,626 against 1,10,848 the year before. Finance costs (1,10,134), finance income 14,240, non-operating expenses (1,894), share of profit of associates and JVs 3,556: profit before tax and exceptional items (46,606). Exceptional items 29,288 lift PBT to (17,318). Current tax (19,391) and a deferred tax credit of 53,584 produce PAT of 16,875. Reversing the exceptional items gives adjusted PAT of (12,413). The effective tax rate is not meaningful, against 33% in FY2018.
| FY2019 | FY2018 | |
|---|---|---|
| Revenue / other operating income / total | 8,07,802 / 2,912 / 8,10,714 | 8,26,388 / 2,488 / 8,28,876 |
| Network operating expenses | (2,23,900) | (1,97,520) |
| Access charges | (93,521) | (90,446) |
| Licence fee and spectrum charges | (69,426) | (75,558) |
| Employee benefit expenses | (37,975) | (39,771) |
| Sales and marketing expenses | (41,277) | (45,275) |
| Other expenses | (83,514) | (77,027) |
| EBITDA | 2,61,101 | 3,03,279 |
| Depreciation and amortisation | (2,13,475) | (1,92,431) |
| EBIT | 47,626 | 1,10,848 |
| Finance costs / finance income | (1,10,134) / 14,240 | (93,255) / 12,540 |
| Non-operating expenses | (1,894) | (141) |
| Share of profit of associates and JVs | 3,556 | 10,609 |
| Profit before tax and exceptional items | (46,606) | 40,601 |
| Exceptional items | 29,288 | (7,931) |
| Profit before tax | (17,318) | 32,670 |
| Current tax / deferred tax | (19,391) / 53,584 | (18,230) / 7,395 |
| Profit after tax | 16,875 | 21,835 |
| Exceptional items reversed / tax impact | (29,288) / nil | 7,931 / (2,630) |
| Adjusted profit after tax | (12,413) | 27,136 |
| Effective tax rate | Not meaningful | 33% |
The levels of profit
Net profit is affected by interest, which is driven by the company's funding choice, and by depreciation and amortisation, which are driven by the infrastructure model adopted to manufacture or serve and whose value depends on accounting choices of method and useful-life estimates. To compare two firms in the same or different sectors, EBITDA is the appropriate choice because it is not contaminated by capital structure and infrastructure choices. The valuation industry has lately also computed adjusted EBITDA, which leaves out investment income and other non-operating income driven by treasury management choices, along with their tax effects. EBITDA also stands in as a proxy for the cash profit earned by operations, but analysts should use it that way only as a last resort.
Adjusted profit after tax
Exceptional and non-recurring items spoil the comparability of net profit, so analysts calculate an adjusted net profit that eliminates them. The tax impact of those items must be factored in as well. The calculation may involve arbitrary adjustment requiring judgement, because the needed numbers are not always available: Bharti Airtel's FY2019 effective tax rate is meaningless since it paid large taxes despite reporting losses, so the analyst must decide how to treat the tax effect. Good practice is to identify the specific item that is unique or exceptional, find the tax rate relevant to it, and use that.
Comparing operating efficiency across firms with different debt and asset bases: EBITDA. Judging the ability to service interest: EBIT. Judging what shareholders finally keep: PAT. Judging trend and comparability across years: adjusted PAT with the tax effect of exceptional items removed. An answer that uses PAT to compare two firms with very different leverage is picking the contaminated metric.
- Most companies present a single-step P&L (all income minus all expenses to profit before tax). Bharti Airtel presents a multi-step statement with EBITDA computed first; analysts redraw single-step statements into multi-step form anyway, using positive signs for income and negative for expenditure.
- Bharti FY2019 waterfall (Rs million): total revenue 8,10,714; EBITDA 2,61,101; depreciation and amortisation 2,13,475; EBIT 47,626; finance cost 1,10,134; finance income 14,240; share of associates 3,556; profit before tax and exceptional items negative 46,606; exceptional items positive 29,288; PBT negative 17,318; current tax 19,391; deferred tax credit 53,584; PAT 16,875; adjusted PAT negative 12,413.
- Gross profit (revenue minus cost of goods sold) is the surplus available for fixed expenses in manufacturing but cannot be computed for Indian companies. EBITDA removes interest (a funding choice) and depreciation and amortisation (an infrastructure choice shaped by accounting methods and useful-life estimates), so it compares firms within or across sectors; adjusted EBITDA also excludes investment and non-operating income driven by treasury choices. EBITDA proxies cash profit only as a last resort.
- EBIT, operating profit, measures the ability to meet annual interest and is the input for interest coverage and free cash flow to the firm. PAT is what remains for shareholders after lenders and the government. Adjusted PAT removes exceptional and non-recurring items together with their tax impact; when the effective tax rate is meaningless, the analyst identifies the specific exceptional item and applies the tax rate relevant to it.