Level 4 · Module 1 · The Business
Business Models: How Companies Make Money
Before any ratio, answer one question: how does this company actually earn?
In this lesson
What you'll be able to do
- Describe a business model in one sentence
- Separate revenue, cost and profit
- Spot recurring vs one-time revenue
Think about it
Zomato and Nestlé both sell food. Why do investors value them completely differently?
Story
Let's picture it
Nestlé manufactures products and sells them through a distribution network, predictable, high-margin, decades old. A food-delivery platform earns a commission per order and depends on volume, discounts and rider economics. Same word 'food', two entirely different economic engines. Valuation follows the engine, not the industry label.
Visual
From revenue to profit
Revenue
Money from selling goods/services
− COGS
Direct cost of what was sold → Gross profit
− Operating expenses
Salaries, marketing, rent → EBITDA / EBIT
− Interest & depreciation
Cost of debt and of using assets → PBT
− Tax
= Net profit (PAT)
Plain English
The simple explanation
Revenue is the top line; net profit is the bottom line. Everything in between is the story of how efficiently the business converts sales into earnings.
Recurring revenue (subscriptions, AMCs, insurance renewals) is valued more highly than one-time project revenue because it is predictable.
Margins tell you pricing power. A business that can raise prices without losing customers usually has a moat.
Real world
Asian Paints
Its strength isn't only paint, it's a dealer network of lakhs of outlets built over decades. Understanding that distribution moat explains the margins better than any single ratio.
Watch out
Common mistakes
- Analysing ratios before understanding the business
- Treating revenue growth as success while profits shrink
- Ignoring one-time gains inflating profit
Did you know?
EBITDA excludes interest, tax, depreciation and amortisation, useful for comparing operations, but it is not cash profit.
Your turn
Mini challenge
Explain any company you use daily in one sentence: 'It makes money by ______ from ______.'
Quick quiz
1 / 3
Wrap up
Summary
Understand the engine first. Ratios only describe an engine you've already identified.
- Revenue ≠ profit
- Recurring revenue is prized
- Margins hint at pricing power
Revise