Essential Financial Concepts: Taxes, Profitability, and Valuation Metrics

Posted on Dec 5, 2025 in Economy

Taxation Systems and Legal Frameworks

Main Direct Taxes

  • Personal Income Tax (PIT): Levied on an individual’s wages, salaries, and other types of income.
  • Personal Wealth Tax: A tax levied on the net fair market value of a taxpayer’s assets.
  • Corporate Income Tax (CIT): Business income taxes applied to corporations, partnerships, small businesses, and self-employed individuals.
  • Taxes on Gifts and Inheritances (Individuals Only):
    • Inheritance Tax: Tax payable on any increase of wealth obtained by reason of the death of a third person.
    • Gift Tax: Levied on the increase of wealth caused by reason of a gift while the transferor is still alive.

A Legal and Ethical Approach to Taxation

  • Differences in the interpretation of tax law and their involvements.
  • Legal Appeal Procedures: Note that tax collection procedures are typically not suspended by the filing of appeals.

Main Indirect Taxes

  • Value Added Tax (VAT): A consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
  • Transfer Tax: A charge levied on the transfer of ownership or title to property from one individual or entity to another.
  • Stamp Duty: A tax a government places on legal documents, usually related to the transfer of assets or property, used to fund government activities.
  • Special Taxes (e.g., alcohol, gasoline, tobacco): These encompass all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees, or other charges imposed by any Governmental Authority on specific goods or activities.

Tax Regulations and Authorities

  • European Tax Authorities
  • Spanish Tax Authorities
  • Foral/Federal Tax Authorities
  • Comunidad Autónoma Tax Authorities (Regional)
  • Town Hall Tax Authorities (Local)

Profitability and Cost Concepts

Key Definitions in Profit Maximization

  • Profit Maximization: Occurs at the largest distance between the total cost and total income curves, specifically when marginal revenue (or price) equals marginal cost.
  • Revenue Maximization: Achieved under constant costs, or through cost minimization under constant revenues.

Cost Classification

  • Fixed Costs: Costs that cannot change in the short run with output or different units produced (e.g., rental, amortization, financial expenses).
  • Variable Costs: Costs that vary directly with output or different units produced (e.g., labor, Cost of Goods Sold – COGS).

Fundamental Formulas

  • Profit = Revenues – Costs
  • Total Costs = Fixed Costs + Variable Costs
  • Total Income = Units × Marginal Revenue
  • Marginal Concept: Related to an additional unit of output.
  • Marginal Revenue = Price
  • Maximal Possible Profit = Total Income – Total Cost

Calculating Net Present Value (NPV)

The NPV calculation involves discounting future cash flows back to their present value and summing them up:

Discounted Value = Expected Cash Flow / (1 + Discount Rate)^Year

The Net Present Value is the sum of all these discounted values.

Business Valuation and Financial Metrics

Criteria for Estimating Industry Value

  • Intangible Criteria: Focus on social and/or environmental returns.
  • Tangible Criteria: Focus on pure financial returns.

Tangible Valuation Methods

Several methods are used for tangible valuation:

  • The Shares Stock Value (Market Capitalization)
  • The Benchmarking and Multiples Value
  • The Discounted Cash Flows (DCF) Value

Best Tangible Valuation Criteria (DCF Focus)

The Discounted Cash Flows valuation criteria is generally the most accepted method, as it is dependent on:

  • Time, risk, and future value estimates:
    • Average life of the asset/project
    • Risk premium measure
    • Future cash flow estimates

Key Financial Metric Definitions

  • Gross Profit Margin: Net sales revenue minus the cost of goods sold.
  • Contribution Margin: Selling price per unit minus the variable cost per unit.
  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Net income (or earnings) without subtracting interest, taxes, depreciation, and amortization.
  • Discount Rate: The rate used to calculate the present value of future cash flows. (A 25% rate is often cited as a prevention of future loss or high-risk premium.)
  • Net Present Value (NPV): A financial metric that seeks to capture the total value of a potential investment opportunity (after accounting for initial cash flow).