Gross Profit = Revenue − Cost of Goods ( COGS )

Operating Income = Gross Profit − Operating Expenses

Adjusted Operating Income = Operating Income − Taxes + Depreciation + Amortization

EBITDA = Operating Income + Depreciation + Amortization

Adjusted EBITDA = EBITDA + Stock Based Compensation + Restructuring Costs

Operating Cash Flow = Adjusted Operating Income − Changes in Working Capital

Free Cash Flow = Operating Cash Flow − Capital Expenditures

Example Calculation

Consider a company with the following financials:

• Revenue: $1,000,000
• COGS: $600,000
• Operating Expenses: $200,000
• Taxes: $50,000
• Depreciation: $30,000
• Amortization: $10,000
• Increase in Working Capital: $20,000
• Capital Expenditures: $40,000
• Stock-Based Compensation: $30,000
• Restructuring Costs: $20,000 (one-time expense)
• Gain on Sale of Asset: $10,000 (one-time gain)

Free Cash Flow = $170,000 − $40,000 = $130,000

Gross Profit = $1,000,000 − $600,000 = $400,000

Operating Income = $400,000 − $200,000 = $200,000

Adjusted Operating Income = $200,000 − $50,000 + $30,000 + $10,000 = $190,000

EBITDA = Operating Income + Depreciation + Amortization = $200,000 + $30,000 + $10,000 = $240,000

Adjusted EBITDA = EBITDA + Stock Based Compensation + Restructuring Costs = $240,000 + $30,000 + $20,000 − $10,000 = $280,000

Operating Cash Flow = $190,000 − $20,000 = $170,000

Free Cash Flow = $170,000 − $40,000 = $130,000