What Is Operating Profit?
Operating profit is the overall earnings from a company’s fundamental business functions for a given period, excluding interest and taxes. It also excludes any profits earned from ancillary investments, such as earnings from other firms with which the firm has a partial stake. When core business income falls short of expenses, an operating loss occurs.
The net income generated by a firm’s primary or core business activities is known as operating profit.
The term EBIT is used to refer to the company’s profit before interest and taxes (which are non-operating costs).
Non-operating income is not included in operating profit. EBIT, on the other hand, takes it into account.
The figure eliminates many irrelevant and indirect factors that might distort a firm’s true performance.
Operating Profit – Formula and Calculation
Operating Profit = Revenue – Operating Expenses – Cost of Goods Sold (COGS) – Depreciation & Amortization
It is often simplified to Gross Profit – Operating Expenses – Depreciation – Amortization.
What Can You Learn from Operating Profit
Because it removes all unneeded elements from the calculation, operating profit is a highly reliable indicator of a company’s health. All costs that are required to keep the firm running are included, which is why operating profit incorporates asset-related depreciation and amortization—accounting tools that arise as a result of a business’s activities.
Operating profit is also known as operating income and earnings before interest and tax (EBIT). However, the terms are often confused due to a lack of knowledge. EBIT includes non-operating income, which is not part of operating income. Therefore, if a firm has no non-operational revenue, its operating profit will equal EBIT.
It can be used in place of net profit to provide a more positive perspective on the firm’s financial position. This is because interest payments and taxes are included in a company’s net profit, so its operating income may present the situation better than the net profit.
On the other hand, positive operating profit does not guarantee future financial success. A firm with a lot of debt, for example, may have a positive operating profit while still having net losses. Furthermore, significant but needless expenses are not factored in, indicating that a firm with a negative net loss has a positive operational result.
Operating Income – Exclusions
Except for any items explicitly created to be sold as part of the core business, we don’t include revenue generated from the sale of assets. Furthermore, we don’t consider interest earned on cash such as checking or money market accounts.
When calculating operating profit, don’t count debt obligations. Even if the company’s ability to conduct normal business operations depends on those debts, this is the case.
Even if the financial benefits relate to the core business operations of another firm, exclude operating income. Sales of real estate and industrial equipment, for example, are not included since they do not contribute to the company’s fundamental activities.
Finding the Operating Profit Margin
Look for the operational profit (or operating income) on the income statement. Then get operating profit margin by dividing operating income by revenue.
What to Exclude from the Operating Profit
The sale of assets results in no revenue being added to the operating profit total, except any items produced to be sold as part of the core business. Furthermore, this figure doesn’t count interest earned from loans like checking or money market accounts. Neither should you include any debt obligations. Finally, it does not include investment earnings generated by a stake in another firm.
Example – Walmart’s operating income from 2006-2022.