:max_bytes(150000):strip_icc()/digital-composite-image-of-businessman-operating-icons-against-gray-background-1093093966-29d494603785416eaf152fa444cd526a.jpg "How to Calculate, What It Tells You, and Example"){kind=icon}
What Is Operating Profit?
A company’s operating profit is its total earnings from its core business functions for a given period. It’s a company’s net income from its core operations after accounting for operating expenses. Operating profit excludes the deduction of interest and taxes as well as any profits earned from ancillary investments such as earnings from other businesses in which a company has a part interest.
An operating loss occurs when core business income ends up being lower than expenses.
Key Takeaways
- Operating profit is the net income derived from a company’s primary or core business operations.
- Operating profit doesn’t include non-operating income although EBIT does.
- It eliminates several extraneous and indirect factors that can obscure a company’s real performance.
- A company’s operating profit margin shows how well a company turns gross revenue into this figure.
Investopedia / Sydney Saporito
Formula and Calculation of Operating Profit
The formula used to calculate operating profit is:
Operating Profit = Gross Profit – Operating Expenses – Depreciation – Amortization
Where:
Gross Profit = Revenue – Cost of Goods Sold (COGS)
Important
Operating profit is also referred to as earnings before interest and tax (EBIT) but EBIT can include non-operating revenue that isn’t included in operating profit. EBIT and operating profit will be the same figure if a company doesn’t have any non-operating revenue.
Understanding Operating Profit
Operating profit serves as a highly accurate indicator of a business’s health because it removes all extraneous factors from the calculation. All expenses that are necessary to keep the business running are included, which is why operating profit takes into account asset-related depreciation and amortization, accounting tools that result from a firm’s operations.
Companies can choose to present their operating profit figures in place of their net profit figures because the net profit of a company contains the effects of taxes and interest payments. The operating profit may present the company’s financial situation more positively than the net profit reflects if a company has a particularly high debt load.
Positive operating profit might express the overall health of a business but it doesn’t guarantee future profitability. A company with a high debt load might show a positive operating profit while simultaneously experiencing net losses. Large but extraneous costs aren’t represented which may also show a company with a negative net profit having a positive operating profit.
| Operating Profit: Non-Operating Income and Expenses Exclusions | |
|---|---|
| Non-Operating Income | Non-Operating Expenses |
| Asset sales | Interest from debt obligations |
| Dividend and investment income | Inventory write-offs |
| Foreign exchange transaction income | Legal settlements |
Special Considerations
Revenue created through the sale of assets isn’t included in the operating profit figure except for any items created for the explicit purpose of being sold as part of the core business. Interest earned from cash such as checking or money market accounts isn’t included either.
The removal of production costs from overall operating revenue along with any costs associated with depreciation and amortization is permitted when determining the operating profit but the calculation doesn’t account for any liabilities that must be met. This is the case even if those obligations are directly tied to the company’s ability to maintain normal business operations.
Operating income doesn’t include investment income generated through a partial stake in another company even if the investment income is directly tied to the core business operations of the second company. The sale of assets such as real estate and production equipment isn’t included either because these sales aren’t a part of the core operations of the business.
Operating Profit vs. Other Profit Measures
Operating profit is one metric that’s used to determine a company’s profitability from its core operations. Other metrics may appear to be the same but they shouldn’t be confused. We’ve highlighted some of the most common ones.
Operating profit vs. gross profit
Operating profit and gross profit are very different concepts. Gross profit is the total revenue of a company minus the expenses directly related to the production of goods for sale such as the cost of goods sold. Companies report their gross profit on their income statement. You can calculate gross profit like this:
Gross Profit = Revenues – COGS
Operating profit is derived from gross profit and reflects the residual income that remains after accounting for all the costs of doing business.
Operating Profit = Gross Profit – Operating Expenses – Depreciation – Amortization
Operating profit vs. earnings before interest, taxes, depreciation, and amortization (EBITDA)
Remember that operating profit is an accounting metric for the stakeholders who care about the operational profitability of the company. Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a cash-focused metric for stakeholders who care about the cash flow of the business.
EBITDA takes operating profit and adds back interest, depreciation, and amortization. Here’s how it’s calculated:
EBITDA = Operating income + Depreciation + Amortization
Operating profit vs. net profit
Net profit is the profit remaining after all costs incurred in the period have been subtracted from revenue generated from sales. Expenses that factor into the calculation of net income but not operating profit include payments on debts, interest on loans, and one-time payments for unusual events such as lawsuits.
Additional income that’s not counted as revenue is also considered in the calculation of net income. It includes interest earned on investments and funds from the sale of assets not associated with primary operations.
Example of Operating Profit
Walmart (WMT) reported operating income of $27.01 billion for its fiscal year 2024. Total revenues (net sales as well as membership and other income) were $648.12 billion. These revenues came from sales across Walmart’s global umbrella of physical stores including Sam’s Club and its e-commerce businesses.
The cost of sales (or COGS) and operating, selling, general, and administrative expenses totaled $490.14 billion and $130.97 billion, respectively.
What Does Operating Profit Tell You?
Operating profit is a useful and accurate indicator of a business’s health because it removes irrelevant factors from the calculation. Operating profit only takes into account those expenses that are necessary to keep the business running. This includes asset-related depreciation and amortization that result from a firm’s operations. Operating profit is also referred to as operating income.
How Do You Calculate Operating Profit?
Operating profit is calculated by taking revenue and then subtracting the cost of goods sold, operating expenses, depreciation, and amortization.
How Do You Find the Operating Profit Margin?
The operating profit or operating income can be found on the income statement or it can be calculated as:
- Revenue – Cost of Goods Sold – Operating Expenses – Depreciation – Amortization
It’s the profit left after deducting the costs of running the business. Operating profit margin is calculated by dividing operating income by revenue.
What’s Excluded From the Operating Profit?
Revenue created through the sale of assets isn’t included in the operating profit figure except for any items that are created for the explicit purpose of being sold as part of the core business. Interest earned from cash such as checking or money market accounts isn’t included either nor does it account for any debt obligations that must be met. It doesn’t include investment income generated through a partial stake in another company.
The Bottom Line
Operating profit looks at a company’s earnings generated through normal business operations. It can be found on the income statement. Analyzing operating profit is useful because it excludes accounting items such as one-time charges, interest, and taxes that can skew a company’s profit in a given year. These items are accounted for in a company’s net profit or bottom line instead.
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