What is 'Operating Profit'
Operating profit is the profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments, such as earnings from firms in which the company has partial interest, and the before the deductions of applicable interest and taxes owed. Operating profit is calculated using the following formula:
BREAKING DOWN 'Operating Profit'Also referred to as earnings before interest and tax (EBIT), operating profit represents the earning power of the company with regard to revenues generated from ongoing operations. Operating profit serves as an indicator to the business’s potential profitability with all extraneous factors removed from the calculation.
Examples of Exclusions from the Operating Profit Calculation
Income created through the sale of assets, outside of those assets created for the purpose of being sold as part of the core business, are not included in the operating profit figure. Additionally, interest earned through mechanisms such as checking or money market accounts are not included.
While the removal of production costs from overall operating revenue, along with any costs associated with depreciation and amortization, are permitted when determining the operating profit, the calculation does not account for any debt obligations that must be met even if those obligations are directly tied to the company’s ability to maintain normal business operations.
Operating income does not include investment income generated through a partial stake in another company even if the investment income in question is tied directly to the core business operations of the second company. Additionally, the sale of assets such as real estate and production equipment are not included as these sales are not a part of the core operations of the business.
Benefits of Referring to the Operating Profit Figure
Companies may choose to present their operating profit figures, in lieu of their net profit figures, as the net profit of a company contains the effects of interest payments and taxes. In cases where a company has a particularly high debt load, the operating profit may present the company’s financial situation more positively than their net profit reflects.
For investors, examining the operating profit may allow for an easier comparison of businesses that operate within industries with differing tax rates or financial structures as this allows for a more equitable comparison.
Operating Profit and Investment Decisions
While positive operating profit may express the overall profit potential of a business, it does not guarantee the business is not experiencing losses. A company with a high debt load may show a positive operating profit while also having a negative net profit. Additionally, large but extraneous costs are not represented, which can again show a company with a negative net profit as having a positive operating profit.