Economic profit approach

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• Churn RateThe percentage of customers who discontinue using a product or service over a given period — the metric that decides whether acquired customers are an asset or a leaking bucket.
• CLTV/CAC ratioCustomer Lifetime Value divided by Customer Acquisition Cost — how many rupees of customer revenue a start-up buys for every rupee it spends winning that customer.
• Cost approachValuing a business from its assets less its liabilities — by book value, by what it would cost to replace, or by what it would fetch if broken up and sold.
• Customer Lifetime ValueThe total revenue a start-up earns from one customer across the whole relationship — average purchase value multiplied by the average number of purchases that customer makes.
• Deal CompsRelative valuation using earnings based multiples — chiefly EV/EBITDA and EV/Sales — which the workbook also calls Transaction Comparables.
• Discounted Cash FlowA valuation method that estimates the cash a business will generate in future years and converts each year back to what it is worth today.