Unit Economics · Metrics · NPV · IRR · EBITDA · Notes

NPV, IRR, EBITDA: Key Metrics for Business Valuation

An analysis of key financial indicators (NPV, IRR, EBITDA) and their application in assessing the investment attractiveness and business efficiency.

Financial metrics are not "numbers for the sake of numbers." They are the language in which a business explains its benefits, sustainability, and ability to generate future profits.

Three indicators—NPV, IRR, and EBITDA—are considered basic. They help entrepreneurs, managers, and investors understand two simple questions:

1. Is it worth launching or continuing a project?
2. How effectively does the business turn operations into money?

If you know how to read these metrics, decisions become calmer, and risks—fewer.

1. NPV — Net Present Value

Purpose: to understand if a project is worth its investment.

NPV answers the question: "If we consider the time value of money, will the project bring in more money than it takes?"

How it works

Future money is worth less than today's—inflation, risks, alternative returns. Therefore, each future cash flow is "brought" to today's value through a discount rate.

Simple logic of the formula:

NPV = Σ (CFt / (1 + r)^t) - C0

If NPV > 0 → the project creates value. If NPV < 0 → the project burns value. If NPV ≈ 0 → you are working "at zero," without a risk premium.

Example (in the spirit of reality)

You invest 1,000,000 ₽. The project will yield 400,000 ₽ per year for 4 years. The discount rate is 12%.

We calculate: present values of flows ≈ 1,268,000 ₽ NPV = 1,268,000 – 1,000,000 = 268,000 ₽ (the project is ok).

How to use

• compare several projects;
• change the discount rate → you'll see how "fragile" the project is;
• use NPV if long-term value is important, not quick payback.

2. IRR — Internal Rate of Return

Purpose: to understand what return a project brings on its own.

IRR answers the question: "At what percentage does the project pay for itself, if considered as an investment?"

Formally, this is the rate at which NPV = 0.

Simple idea

If IRR is higher than the cost of capital (your minimum desired return) → the project is profitable.

Example: Project IRR = 18%. Your minimum return = 12%. This means the project provides a premium and compensates for risk.

How to use

• rank projects by IRR if the budget is limited;
• compare with alternatives (deposits, bonds, risky investments);
• don't use IRR alone if cash flows "jump" (there may be multiple IRRs).

IRR is the "project growth rate," but without looking at NPV, you might misjudge the scale.

3. EBITDA — Operational Efficiency Without Noise

Purpose: to understand how the business operates before accounting for capital structure, taxes, and amortization.

EBITDA is:

Revenue
– Operating Expenses
= EBITDA

It shows how the business generates money before decisions about loans, taxes, and amortization.

Why this is important

• allows comparison of businesses with each other;
• helps to see real operational efficiency;
• often used as a basis for multipliers in valuation (e.g., EV/EBITDA).

But don't confuse

EBITDA ≠ cash flow. A company can show excellent EBITDA and at the same time die in cash gaps.

How to Read These Three Metrics Together

Here's how to link them into one whole:

• EBITDA shows the current operational form of the business—how it "breathes" here and now.
• NPV shows if the project creates value in the future.
• IRR shows if you should invest money here, and not in an alternative.

When you look at them together, a three-dimensional picture emerges: efficiency → value → profitability.

Checklist: Are You Interpreting the Metrics Correctly?

• [ ] EBITDA is positive and growing month-over-month.
• [ ] Cash flow is also positive (important!).
• [ ] NPV > 0 at a rate that reflects real risk (don't set 5% for beauty).
• [ ] IRR is higher than the cost of capital or your minimum required return.
• [ ] A stress test has been conducted: what if sales decrease by 20%?
• [ ] Alternatives have been checked: is there a project with a better NPV/IRR?

If there are no problems with these points—the project looks healthy.

Mini-Calculator (Excel/Notion-ready)

Add scenarios: Base / Optimistic / Worst—and you have a ready tool.

Short Conclusion

NPV, IRR, and EBITDA are simple but powerful lenses. Through them, you can see how a project creates value, brings profitability, and operates internally.

Think about which of these three metrics you have calculated now, which you haven't, and what prevents you from using them in daily decisions. The sooner you add them to your thinking system, the calmer you will make financial decisions.