The factory floor hums with productivity. Row after row of green harvesters, partially assembled, waiting for hydraulics and cabs. The smell of welding flux and machine oil. In the conference room above, Wilhelm Ludwig von Raunheim—CEO, third-generation owner, fountain pen on desk—faces Schilling, his Head of Sales.
Schilling is lean, 38, hungry. He believes in volume.
"Our factories are at 75% capacity," Schilling says. "We're leaving €30 million of revenue on the table. A 5% price cut drops us from €332k to €315k per harvester. Market studies show a 15% volume response. We'd sell 345 units instead of 300. Revenue jumps from €99.6m to €108.7m. Factory hums harder. Overhead gets allocated over more units. Profit increases."
Wilhelm sets down his pen. "My grandfather," he says quietly, "cut prices during the Depression. Once. He sold harvesters at a loss to keep the factory running. The customers—struggling farmers—remembered the discount, not the quality. When the economy recovered, they expected that price to remain. It took fifteen years to restore the margin. He told my father: Never discount to fill capacity. You destroy the brand."
Schilling frowns. "That was 1931. Markets are efficient. Customers are rational."
"Are they?" Wilhelm looks at the spreadsheet. "You assume 15% elasticity. Where does that come from?"
"Industry data."
"Industry data assumes customers treat our harvesters as commodities. They don't. Our customers are cooperatives. They talk. If they learn we just cut prices, two things happen: the smart ones wait for the next cut, and the loyal ones feel cheated. That relationship dies. Your spreadsheet doesn't capture that cost."
In the corner, Trace Flint—A2 analyst on secondment from SBCI—takes notes. She writes one word: Leverage. She circles it twice.
Neither man is entirely right. But only one is thinking like an investor. To understand profitability, we begin with the simplest question: What is profit? Not accounting profit. The gap between what customers pay and what you spend to serve them. That gap determines everything: whether you survive, whether you grow, whether an investor values you at €80 million or €150 million.
Eddie Brown, 68, retired dentist, angel investor, sits with Magda Kowalska, 34, founder of Subtrax. Magda scrolls to her income statement on her laptop.
"Revenue £5.3 million," she says. "Profit is negative £900,000."
Eddie squints. "So you made £5.3 million and lost £900,000? That means costs were £6.2 million. How?"
"Let me explain with your dental practice. You charge £120 for a checkup. Your cost is £80. Profit per patient: £40, which is 33% margin. Clear?"
"Yes."
"Now imagine you charge a firm £5,000 per month for scheduling software. Your cost is maybe £750—servers, support, a customer success person checking in. That's 85% margin. But to acquire that customer, you spent £19,000 in sales and marketing. The customer stays 3 years average. Lifetime value is £180,000. Payback is 10 months. Then pure profit."
Eddie nods. Then: "But you have 71% margin and you're losing money. My clinic has 52% margin and makes £48,000. That's impossible."
Magda smiles. "That is the best question you've asked me."
| Line Item | Eddie's Clinic | Subtrax |
|---|---|---|
| Revenue | £250,000 | £5,300,000 |
| Cost of Goods Sold | £120,000 | £1,540,000 |
| Gross Profit | £130,000 | £3,760,000 |
| Gross Margin % | 52% | 71% |
| Sales & Marketing | £5,000 | £1,800,000 |
| Personnel (excluding COGS) | £40,000 | £850,000 |
| Operations & Rent | £10,000 | £400,000 |
| Operating Expenses | £55,000 | £3,050,000 |
| EBITDA | £75,000 | £710,000 |
| D&A | £10,000 | £40,000 |
| Net Profit | £48,000 | (£910,000) |
| Net Margin % | 19% | (17%) |
Why this matters: Same template. Opposite stories. Eddie is at steady state—fixed operating costs, high utilisation, low growth investment. Magda is at high growth—discretionary S&M spend, paying to build capacity ahead of demand. Both are correct. Both require understanding.
Eddie: "Your gross margin is 71%. Mine is 52%. And you're losing £900,000 while I make £48,000. How is that possible?"
Magda: "Three reasons. One: Sales & Marketing. You spend nothing. I spend £1.8m—34% of revenue. Two: Personnel. You have four people. I have nine—£850,000 vs £150,000. Three: Scale. You're at 95% utilisation. I'm at 40%. I have people building product, thinking about roadmap. You don't. I will reach scale. Then 71% margin flows to profit."
Eddie is quiet. Thinking about his 40-year practice. Never scaled. Never tried.
"How long until you break even?"
"If we hit our targets, FY26. In three years. Then we're profitable with the same margin percentage. The machine is built. All we need is more volume."
Eddie leans back. "So the income statement tells the story?"
"The most important story. If you learn to read it, you understand why two businesses with the same revenues have completely different futures."
The PE investor reads an income statement differently than an accountant. An accountant asks: "Is this compliant? Is this auditable?" A PE investor asks: "What drives this number? How sensitive is it to change? What can I control?"
PE thinks in three levers. Revenue structure (Price × Volume). Cost structure (variable vs fixed). And scale (where do fixed costs become negligible).
This chapter walks through all three. By the end, you will understand why Wilhelm rejected Schilling's discount. Why Trace circled "Leverage." Why Subtrax's loss is a feature. How to read a margin stack and see not what a business makes today, but what it can make tomorrow.
Two businesses. Same income statement template. Radically different economics. One is 127 years old and cash-generative. One is five years old and burning cash. By the end, you will understand how to value both and why an investor might value the loss-maker higher.
| Company | Revenue | Volume | ASP | Growth % | Price vs Volume |
|---|---|---|---|---|---|
| KÖNIGSHOF FY23→FY24 | |||||
| FY23 | €93.0m | 286 units | €325k | ||
| FY24 | €99.6m | 300 units | €332k | ||
| Change | +€6.6m | +14 units | +€7k | +7.1% | Volume +4.9% | Price +2.2% |
| SUBTRAX FY23→FY24 | |||||
| FY23 | £3.88m | 218 cust | £17.8k | ||
| FY24 | £5.30m | 272 cust | £19.5k | ||
| Change | +£1.42m | +54 cust | +£1.7k | +36.6% | Volume +24.8% | Price +9.6% |
Insight: Königshof growth is price-driven (2.2pp of 7.1%). This suggests pricing power. Subtrax is volume-driven (24.8pp of 36.6%). Classic SaaS: more customers + upsell = acceleration. Different engines. Different risk profiles.
| Line Item | Amount (£m) | % Revenue | Commentary |
|---|---|---|---|
| Revenue | 5.30 | 100% | 272 customers @ £19.5k ASP |
| Customer Success Managers | (0.94) | 18% | CSM team, onboarding, renewals |
| Customer Support | (0.17) | 3% | Tier 1 support team |
| Hosting & Infrastructure | (0.42) | 8% | AWS, CDN, payment processing |
| Total COGS | (1.54) | 29% | |
| Gross Profit | 3.76 | 71% | Excellent product economics |
| Sales & Marketing | (1.55) | 29% | Acquire 60 new customers/year @ £19k CAC |
| General & Administrative | (3.08) | 58% | Engineering, operations, finance, rent, legal |
| Total OpEx | (4.63) | 87% | Fixed cost base plus discretionary growth spend |
| EBITDA | (0.87) | (16%) | Operating loss due to growth investment |
| Depreciation & amortisation | (0.04) | 1% | Capitalized software |
| EBIT | (0.91) | (17%) | Operating loss |
| Interest | 0.00 | 0% | No debt |
| Tax | 0.00 | 0% | No tax on operating loss |
| Net Income | (0.91) | (17%) | The 71% gross margin flows to growth, not profit—yet |
Key insight: Subtrax's 71% gross margin is eaten by discretionary growth spend. The operating loss is a choice — cut S&M and the company is profitable tomorrow. The unit economics are sound; scale will fix the P&L.
| Component | Cost (£) | Notes |
|---|---|---|
| COGS (Direct) | ||
| Cloud hosting (AWS, Stripe fees) | £1,200 | Per customer/year |
| Payment processing | £300 | 2% of revenue |
| Hosting & Payment | £1,500 | |
| CUSTOMER SUCCESS | ||
| Support (allocated) | £630 | Shared team |
| CSM (allocated) | £3,500 | 1 CSM / 7 customers |
| Customer Success | £4,130 | |
| Total Variable/Customer | £5,630 | 71% contribution |
| ACQUISITION | ||
| CAC | £19,000 | S&M spend / new customers |
| Payback | 16.5 months | CAC ÷ annual contribution |
| LTV (3-year avg) | £41,610 | Contribution × 3 |
| LTV:CAC | 2.2x | Rule: >3x is better |
Key insight: Each customer generates £13,870/year contribution. At 272 customers, that's £3.77m total. But Subtrax spends £1.8m on acquiring new customers (fixed at that growth rate). So the company loses £0.9m. But at 500 customers (contribution £6.9m) with similar operating expense, profit = £4.3m. The model is correct. Scale fixes it.
| KÖNIGSHOF FY24 (€26.0m total) | % Revenue | |
|---|---|---|
| Factory overhead (depreciation, rent) | €15.4m | 15.5% |
| Corporate overhead (finance, HR, legal) | €6.2m | 6.2% |
| Sales force base salaries | €2.8m | 2.8% |
| Engineering & design | €1.6m | 1.6% |
| Total | €26.0m | 26.1% |
| SUBTRAX FY24 (Fixed portion ~£1.65m + Variable S&M) | ||
| Base salaries (engineering, ops) | £850k | 16% |
| Office rent | £320k | 6% |
| Insurance, legal, compliance | £150k | 3% |
| Cloud infrastructure (fixed) | £100k | 2% |
| Marketing (brand, content) | £230k | 4% |
| True Fixed Costs | £1.65m | 31% |
| Plus: Sales & Marketing (Variable) | £1.8m | 34% |
| Total Operating Expenses | £3.45m | 65% |
The difference: Königshof's fixed costs are permanent. The factory doesn't close at 50% utilisation; it still costs €15.4m. Subtrax's true fixed costs (£1.65m) could support £2.32m in revenue at 71% margin. The operating loss comes from voluntary growth investment in S&M. In a recession, Magda can cut S&M and be profitable. Wilhelm cannot escape his factory. This is the fundamental difference between asset-heavy and asset-light businesses.
Stage 1: Top Line (Revenue)
What you collect from customers. For Königshof, €99.6m from 300 harvesters. For Subtrax, £5.3m from 272 customers + expansion revenue.
Stage 2: Gross Profit (Revenue - COGS)
The contribution available to cover sales, marketing, admin, and profit. Königshof: €31.8m (32% margin). Subtrax: £3.76m (71% margin). High gross margin doesn't guarantee high net margin—it depends on how you spend on OpEx.
Stage 3: EBITDA (Gross - Operating Expenses)
Operating profit before financing and accounting entries. This is closest to true operational cash profit. Königshof: €15.9m (16% of revenue, healthy). Subtrax: (£0.87m) ((16%), investment phase). EBITDA is where PE investors start their analysis.
Stage 4: Net Income (EBITDA - D&A - Interest - Tax)
Bottom line. What actually accrues to shareholders. Königshof: €3.5m (4% net margin). Subtrax: (£0.91m) (loss). Net profit reflects not just operations but financing and accounting choices. PE focuses on EBITDA for valuation, not net.
| Line Item | Amount (€m) | % Revenue | Commentary |
|---|---|---|---|
| Revenue | 99.6 | 100% | 300 units @ €332k ASP |
| Materials & components | (48.6) | 49% | Steel, hydraulics, electrical, cabs |
| Direct labour | (15.7) | 16% | Welders, assemblers, painters |
| Indirect labour & factory overhead | (9.3) | 9% | Supervisors, maintenance, utilities |
| Sales, G&A & other operating | (10.1) | 10% | Sales, admin, R&D, insurance |
| Total operating costs (excl. D&A) | (83.7) | 84% | |
| EBITDA | 15.9 | 16% | Operating cash profit before financing |
| Depreciation & amortisation | (10.1) | 10% | Factory equipment, software |
| EBIT | 5.8 | 6% | Operating profit |
| Interest expense, net | (0.8) | 1% | Less interest income on €40m cash |
| Tax | (1.5) | 2% | German corporate tax |
| Net Income | 3.5 | (1%) | From €99.6m at the top, €83.7m runs the business |
Note on adjusted vs reported: The figures above are the adjusted P&L, stripping out one-off items (FY23 legal settlement, FY24 CEO replacement costs). The reported EBIT was lower — €4.8m in FY23 and €5.8m in FY24 — because those one-offs hit the accounts. The Adjustments section below explains the difference and why PE investors care about it.
| Line Item | Amount (£m) | % Revenue | Commentary |
|---|---|---|---|
| Revenue | 5.30 | 100% | 272 customers @ £19.5k ASP + expansion |
| Cloud hosting | (0.33) | 6% | AWS, infrastructure, CDN |
| Payment processing | (0.09) | 2% | Stripe fees on revenue |
| Customer support | (0.51) | 10% | Tier 1 support team |
| Cost of customer success | (0.61) | 12% | CSMs, onboarding, renewals |
| COGS | (1.54) | 29% | |
| Gross Profit | 3.76 | 71% | Excellent margin |
| Sales commissions & S&M | (1.80) | 34% | Acquire 60 new customers/year @ £19k CAC |
| Core personnel (non-COGS) | (0.85) | 16% | Engineering, operations, finance |
| Rent & facilities | (0.32) | 6% | Shoreditch office |
| Insurance, legal, compliance | (0.15) | 3% | SaaS compliance overhead |
| Marketing (brand, content, events) | (0.23) | 4% | Fixed brand spend |
| Operating Expenses | (3.35) | 63% | Discretionary growth investment |
| EBITDA | (0.87) | (16%) | Operating loss due to growth investment |
| Depreciation & amortisation | (0.04) | 1% | Capitalized software |
| EBIT | (0.91) | (17%) | Operating loss |
| Interest | 0.00 | 0% | No debt, minimal interest income |
| Tax | 0.00 | 0% | No tax on zero profit |
| Net Income | (0.91) | (17%) | The 71% gross margin flows to growth, not profit—yet |
Key insight: Subtrax's 71% gross margin is eaten by discretionary growth spend. The operating loss is a choice — cut S&M and the company is profitable tomorrow. The unit economics are sound; scale will fix the P&L.
Eddie: "So you're losing money on purpose?"
Magda: "We're investing in a cost structure that doesn't exist yet. Right now, I'm spending £1.8m on sales to acquire 60 customers. That's discretionary. I could cut it and be profitable at £5.3m revenue. But I don't, because those 60 customers generate £240k in first-year contribution. Over 3 years, each customer is worth £41,610. So I'm spending £19k to acquire £41.6k. That's a trade. I'm profitable per customer, unprofitable per company. As I acquire more customers, the company margin improves because the unit economics stay great and the fixed costs are allocated over a bigger base."
Eddie nods. He understands now. The loss is not a symptom of broken economics. It's a choice. It's a bet that scale will compound the margin advantage she already has.
Net Income: Bottom line. Reflects operations, financing, accounting choices, and taxes. For Königshof, €3.5m. For Subtrax, (£0.9m) (or maybe £0, depending on how you count stock options). Net income tells you how much cash went to shareholders historically. But it is not predictive of future cash flow for three reasons:
1. Financing is a choice, not a business fundamental. A company financed with debt has lower net income due to interest. The same company financed with equity has zero interest and higher net income. But the underlying business is identical. EBITDA strips out financing, so you're comparing apples to apples.
2. Depreciation and amortisation are accounting, not cash. Königshof's €10.1m D&A is largely depreciation on the factory. It's a non-cash charge. The company does pay cash capex to maintain the factory, but D&A is a smoothing mechanism, not the true cost. EBITDA adds this back.
3. Taxes are complex and variable. A company with losses has zero taxes today but tax benefits in the future (carryforwards). A profitable company has taxes today. EBITDA strips out taxes entirely, letting you see operational power independent of tax structure.
Result: PE investors value companies on EBITDA multiples, not net income multiples. Königshof's €15.9m adjusted EBIT at 8x multiple = €127.2m enterprise value. That's almost entirely independent of the company's €3.5m net income or financing structure. The net income is useful for understanding historical cash flow to shareholders, but EBITDA is what drives enterprise value.
Königshof FY24 (Adjusted)
What you see: Revenue of €99.6m flows to gross profit of €31.8m (32% margin). Then operating expenses eat €16m, leaving EBITDA of €15.9m (16%). Then D&A removes another €10m, leaving operating profit of €5.9m (6%). Then taxes and interest reduce net to €3.5m (4%). Each step is a leak. This waterfall is why understanding each layer matters.
Subtrax FY24 Projected (at break-even)
What you see: Subtrax's gross margin is nearly 2.2x Königshof's (71% vs 32%). But operating expenses are 63% of revenue vs Königshof's 26%. So EBITDA is only 8% vs 16%. The high gross margin advantage is completely eroded by discretionary growth spend. But the key insight: As Subtrax scales, gross margin stays high (unit economics don't change) but OpEx as % of revenue falls (fixed costs amortized over bigger base). At 500 customers, Subtrax could have 50% EBITDA margin. That's the dream.
A company's reported financial statements show what happened. Adjusted financials show what would happen if one-off, non-recurring items didn't exist. PE investors adjust for one-time charges because they're trying to value ongoing operations, not historical noise. But adjusting is an art, not a science, and therein lies danger.
| FY | Reported EBIT | Adjustments | Type | Adjusted EBIT |
|---|---|---|---|---|
| FY22 | €13.8m | — | — | €13.8m |
| FY22: €6.2m legal costs from supplier contract dispute (fully settled). | ||||
| FY23 | €4.8m | +€6.0m | Green | €10.8m |
| FY23: €6.0m legal costs from major patent lawsuit (settled, unlikely to recur). Also included €1.5m severance from restructuring (factory optimization). | ||||
| FY24 | €5.8m | +€2.5m | Amber | €8.3m |
| FY24: €6.0m from FY23 legal (continuing into FY24 due to appeal, reconsider if it's "one-time"). €1.2m severance from management restructuring. €1.1m write-off of obsolete parts inventory (result of FY23 demand shock). €0.5m CEO retirement bonus (documented). | ||||
The danger: Königshof's adjusted EBIT looks stable (€13.8m → €10.8m → €15.9m). But the underlying business is more fragile. The legal costs (€6m+ across two years) suggest operational risks (patent exposure). The severance (€1.5m + €1.2m) suggests ongoing restructuring, not a one-time event. The inventory write-off (€1.1m) is a consequence of poor demand forecasting in FY23, which is operational, not one-time.
A disciplined PE investor would be conservative: Report adjusted EBIT at €15.9m but flag that €2–3m of this is questionable (the recurrence of legal costs, the ongoing restructuring). Then model downside scenarios where those costs persist.
What Haircut would do: Walk through each adjustment with Wilhelm. Ask: "What's the probability this legal cost happens again? 5%? 20%?" Then apply a probability weight to each adjustment. Adjusted EBITDA becomes a range (€13.5m–€15.9m), not a point estimate. This is how PE handles adjustment risk.
Back to the opening scene in Würzburg. Schilling wants a 5% price cut to drive 15% volume growth. Wilhelm is skeptical. Now you have the tools to understand why Wilhelm is right, and precisely how wrong Schilling could be. The mechanism is operating leverage. It is the most important concept in this chapter.
Base Case FY24 (Adjusted)
Revenue: €99.6m | Volume: 300 units | ASP: €332k
Variable costs: (€64.3m) (€214k/unit × 300) | Contribution: €35.3m (35%) | All other costs (semi-variable + fixed + SG&A): (€19.4m) | D&A: (€10.1m)
Adjusted EBITDA: €15.9m (16%) | Adjusted EBIT: €5.8m (6%)
Scenario 1: +10% Revenue (via volume, price unchanged)
30 additional harvesters at €332k = €10.0m additional revenue
Variable cost of 30 units: 30 × €214k = (€6.4m)
Incremental contribution: €3.6m — flows almost entirely to EBIT because fixed costs do not change
New EBIT: €5.8m + €3.6m = €9.4m
EBIT change: +€3.6m = +62% on a 10% revenue increase
DOL: 62% ÷ 10% = 6.2x
Reverse: a 10% revenue decline (30 fewer harvesters) removes €3.6m of contribution. EBIT falls from €5.8m to €2.2m — a 62% decline.
Scenario 2: Schilling's Proposal (5% price cut, 15% volume gain)
New ASP: €332k × 0.95 = €315k | New volume: 300 × 1.15 = 345 units
New revenue: 345 × €315k = €108.7m (+9.1%)
Step 1 — Extra contribution from 45 new units: 45 × (€315k − €214k) = 45 × €101k = +€4.5m
Step 2 — Lost margin on existing 300 units from price cut: 300 × (€332k − €315k) = 300 × €17k = (€5.0m)
Step 3 — Net contribution change: +€4.5m − €5.0m = (€0.5m)
New EBIT: €5.8m − €0.5m = €5.3m — EBIT falls despite 9% higher revenue
Revenue went up. Factories got busier. EBIT went down.
Why it fails: The volume gain on 45 new units does not compensate for the margin erosion on 300 existing units. Each new unit contributes €101k (at the reduced price). But each existing unit loses €17k. You need 45 × €101k = €4.5m to exceed 300 × €17k = €5.0m. It does not. The break-even elasticity for a 5% price cut is roughly 17% volume gain — Schilling assumed 15%, which is below the threshold.
Wilhelm was right. Not because of tradition. Because the arithmetic does not support a 5% price cut unless volume response exceeds 17% — and for a premium, differentiated manufacturer with loyal co-operative customers, that elasticity is unlikely.
Use the sliders below to adjust revenue growth for both companies. Watch how EBIT (and EBIT %) changes disproportionately.
Königshof (High Operating Leverage)
Subtrax (Lower Operating Leverage)
Trace opens her notebook. On the first page, written during the Wilhelm-Schilling meeting, is one word: "Leverage."
Below it, she has now written:
"Wilhelm rejected Schilling's discount because:
1. Base case contribution per unit: €118k
2. At 300 units, total contribution: €35.4m
3. Fixed costs: €26m
4. Breakeven units: 220 (at current ASP)
5. Schilling's 5% cut drops ASP to €315k
6. New contribution per unit: €101k (€315k - €214k variable)
7. New breakeven: 257 units
8. If Schilling is right (15% volume gain): 345 units > 257, still profitable
9. If Schilling is wrong (only 10% volume gain): 330 units > 257, still profitable
10. But even at 345 units, EBIT falls from €5.8m to €5.3m. Schilling's plan destroys (€0.5m) of value. Volume gains do not compensate for margin erosion on the base.
So the price cut only makes sense if elasticity is provably >15%, and you have no brand damage. Wilhelm doesn't believe either assumption. He's right."
Trace circles step 10 three times. This is the crux. Operating leverage is not just about breakeven. It's about the asymmetry: volume gains flow to profit. Price cuts reduce the amount of profit that flows from volume gains. The cost-benefit only works if elasticity is high and certain.
"Most companies," Trace writes, "mistake high DOL for fragility. They see that small volume changes mean big profit changes, and they panic. They cut price to 'protect' volume. But cutting price makes the profit swings even more extreme. If you have high DOL, the answer is: manage volume carefully. Don't thrash around."
Eddie's original question: "You have 71% gross margin and lose money. I have 52% and make £48k. How is that possible?"
The full answer now has four layers:
Layer 1 (Gross Margin): Subtrax has 71% because each customer's serving cost (hosting + support) is only 29% of ASP. Königshof has 32% because materials and labour cost 68% of ASP. Different unit economics, different industries.
Layer 2 (Operating Expenses): Subtrax spends 63% of revenue on OpEx (sales, marketing, core personnel). Eddie's clinic spends only 42%. Why? Subtrax is growing (discretionary S&M spend). Eddie is at steady state. Magda could cut S&M and be profitable at current revenue. She doesn't, because growth has higher lifetime value than profitability today.
Layer 3 (Fixed Costs): Subtrax's true fixed costs (£1.65m) are much smaller than Königshof's (€26m) in absolute terms, and much smaller as % of revenue (31% vs 26%). This is because Subtrax is asset-light (software, not factories). Subtrax's choice to spend on S&M is discretionary. Königshof's fixed costs are mandatory.
Layer 4 (Operating Leverage): Königshof has 5.5x DOL. Small revenue changes drive big profit changes. This makes the business fragile when you're near breakeven. Subtrax has lower DOL because it's at loss—there's less leverage. But as Subtrax scales and fixed costs are amortized, DOL will rise. At 500 customers (£10.6m revenue, £3.76m gross profit at 71% margin, £1.65m fixed costs), Subtrax would have EBITDA of £5.11m (48% margin). That's extreme DOL on the upside.
The Summary: Königshof's profit (€3.5m) comes from a 32% gross margin on stable, mature volume. It's a harvester, not a machine. Subtrax's loss ((£0.9m)) comes from a 71% gross margin being invested entirely into growth, because the unit economics support it. In 3–4 years, if Subtrax reaches 500 customers and reduces growth spend, it will have £5m+ EBITDA. Königshof will still have £3.5m. Subtrax will be worth more, despite being worth less today.
Le Pitch falls asleep in the train to Lyon, Königshof's financials still on his screen. He dreams.
Revenue sits at a table in a ball gown, very drunk. She is telling stories, spinning, laughing, making increasingly ambitious promises. "I will grow 20% next year," she says. "No, 30%." She is unreliable.
Gross Profit sits next to her in a Countess's tiara, increasingly alarmed. "Do you know what she costs?" Gross Profit asks, gesturing at Revenue. But Revenue is still talking, and Gross Profit has to listen.
EBITDA is in the fog with sequins and a cocktail, somewhere between visible and invisible. Sometimes you can hear her voice. Sometimes she disappears entirely. She is the real one, everyone knows this, but she is hard to find.
Net Income is crawling under the table, crying, overwhelmed by the crowd. "It's not my fault," it keeps saying. "I only show what she decides to finance."
A one-off charge floats through the ballroom dressed as a bird, making a sound like a laugh. "I am temporary," it says, and no one believes it, because it keeps coming back.
Le Pitch tries to grab Revenue's hand and ask: "Which part of you is real?" But she slips away, laughing.
Le Pitch wakes. The train is somewhere in Burgundy. The countryside is pre-dawn grey. He looks at his laptop again. Königshof's numbers. Simple. Brutal. Real.
Revenue: €99.6m. Not a drunk woman. Harvesters. Real machines with real customers.
EBIT: €5.8m reported, €8.3m adjusted (adding back the €2.5m CEO replacement). EBITDA: €15.9m adjusted. The adjusted figures strip out one-offs. But the legal costs recurred across FY22-23, and the severance suggests ongoing restructuring. What if adjusted EBIT is closer to €7m than €8.3m?
At 8x multiple (reasonable for industrial manufacturing), that's €96–127m in enterprise value. With €40m cash and zero debt, the equity is worth €136–167m. It's a reasonable valuation. But the downside is real: a 20% volume miss and EBIT goes negative.
This is why Wilhelm has kept the factory running at 75% utilisation and is reluctant to cut prices. He is managing the asymmetry. Small revenue misses become large profit losses when you have high fixed costs and high DOL.
Magda, by contrast, is managing for growth. She is spending on S&M knowing that each customer is profitable. In 3 years, when she has 500 customers, the £1.65m in fixed costs will be 10% of revenue instead of 31%. Then profit scales.
Two strategies. Both correct for their contexts. Both visible in the income statement.
Le Pitch closes the laptop. He knows what to do with Königshof: a financial buyer (PE) can improve margins through cost efficiencies. A strategic buyer (a larger manufacturer like AGCO or CNH) can take some of that excess capacity and fill it. But neither can change the fundamental fact: manufacturing has high operating leverage. Get it right and profit scales. Get it wrong and profit collapses.
For Magda, the question is simpler: Can she stay profitable as she grows? If yes, Subtrax is worth €50m+ in three years. If no (if CAC stays at £19k but LTV falls due to churn), she's trapped.
But the income statement tells both stories. You just have to know how to read it.