Operating Profit
Operating profit, also known as operating income, EBIT (Earnings Before Interest and Taxes), or operating earnings, is a measure of the profit a company generates from its core operations before accounting for interest and taxes.
It’s calculated by subtracting all operating expenses (including the cost of goods sold (COGS), wages, depreciation, and overhead costs) from the company’s total revenue.
The formula is as follows:
Operating Profit = Gross Income – Operating Expenses
Here,
- Gross Income is the total revenue minus the cost of goods sold (COGS).
- Operating Expenses include costs such as wages, rent, utilities, depreciation, and other costs associated with day-to-day business operations.
Operating profit is a key figure because it shows the profitability of the company’s core operations, excluding factors like tax rates and capital structure, which can vary from company to company. By looking at the operating profit, investors, creditors, and others can get a clear view of the company’s operational efficiency and its ability to generate profit through core operations.
Example of Operating Profit
Let’s consider a hypothetical company called Example Corp. Here are some simplified financials for the fiscal year:
- Total Revenue: $1,000,000
- Cost of Goods Sold (COGS): $400,000
- Operating Expenses (salaries, rent, utilities, depreciation, etc.): $200,000
The first step to calculate operating profit is to determine the Gross Income:
Gross Income = Total Revenue – COGS = $1,000,000 – $400,000 = $600,000
Next, we calculate the Operating Profit:
Operating Profit = Gross Income – Operating Expenses = $600,000 – $200,000 = $400,000
So, Example Corp’s operating profit for the fiscal year is $400,000. This means that after deducting the cost of producing its goods and the costs associated with running the business, Example Corp made a profit of $400,000 from its core business operations before accounting for interest and taxes.
It’s worth noting that this is a simplified example. In real-world scenarios, both the revenue and expenses of a company can be composed of many different elements, and companies often have non-operating income and expenses as well, which aren’t considered in the calculation of operating profit.
