Underlying Profit

What is an 'Underlying Profit'

An underlying profit describes an actual reflection of a company's profit. The underlying profit is not the required accounting profit that is recorded on financial statements and documents mandatory to follow preset rules and regulations. This number is calculated by the company to show what it believe to be an accurate reading of the company's profit position and may exclude one-time charges or infrequent events.

BREAKING DOWN 'Underlying Profit'

The calculation of underlying profit is different for every company. It begins with the accounting profit and makes adjustments as it sees fit. In recent years, it has been argued that there should be some kind of guideline in place so that the reporting of underlying profits can be compared between companies.

When dealing with proper reporting, the accounting profit will need to be used for tax purposes. The underlying profit is incomplete and is used for internal business planning only.

Business Planning and Underlying Profit

A business plan is a functional road map providing direction as to how the company will operate. From an accounting perspective, it also denotes any expected expenses that must be covered over a particular period of time. When determining what operating costs can be reasonably covered, a business may prefer to use its underlying profit calculation, which removes any one-time or highly irregular financial transactions that may falsely inflate profit norms. This creates a plan based on more common occurrences.

Regular Operating Expenses

Regular operating expenses involve a variety of areas, covering any form of expense that can be considered predictable or required. Personnel expenses, including everything from payroll to training, are often considered to be operating expenses. Facility expenses, including rent or mortgage payments (if applicable), utilities, and insurance qualify. Technology-related expenses, including software maintenance and upgrades, and asset replacement are often considered to be operating expenses.

Example of a One-Time Event Removed for the Calculation of Underlying Profit

If a company is in full ownership of two buildings, one currently in use and one sitting vacant, it may choose to sell the vacant building. While the sale of this asset must be recorded for standard accounting purposes, it is excluded from the calculation of underlying profit. The sale of a large asset, such as a building, is not a standard part of the business's operation. Though it has resulted in a form of income, it is not likely to be repeated in subsequent accounting cycles for the company.

RELATED TERMS
  1. Profit

    A financial benefit that is realized when the amount of revenue ...
  2. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  3. Accounting Profit

    A company's total earnings, calculated according to Generally ...
  4. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  5. Profit Center

    A branch or division of a company that is accounted for on a ...
  6. Pretax Profit Margin

    A company's earnings before tax as a percentage of total sales ...
Related Articles
  1. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  2. Investing

    What is Profit?

    Profit is a general term used to denote when earnings exceed the expenses incurred to generate those earnings.
  3. Entrepreneurship & Small Business

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  4. Markets

    Operating Profit

    Operating profit is the profit generated from the core business of a company before accounting for interest and taxes.
  5. Investing

    What are Operating Expenses?

    An operating expense is any expenditure made for the purpose of operating a business. These expenses are the day-to-day costs that help keep the business going. Operating expenses are reflected ...
  6. Investing

    What Is The Difference Between Revenue And Profit?

    Think of revenue as the top line of a company’s income statement. Profit is the infamous bottom line.
  7. Investing

    Profit Metrics: Gross, Operating & Net Profits

    In addition to net profit, most analysts look at a company’s gross profit and operating profit to gauge performance.
  8. Investing

    Explaining Accounting Profit

    Accounting profit is the net earnings of a business as calculated under Generally Accepted Accounting Principles (GAAP).
  9. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  10. Markets

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
RELATED FAQS
  1. What does operating profit margin tell a business owner?

    Learn about the operating profit margin, how it is calculated and what it says to both business owners and investors about ... Read Answer >>
  2. What is the formula for calculating profit margins?

    Learn about gross, operating and net profit margins, how each is calculated and how they are used by businesses and investors ... Read Answer >>
  3. What is the difference between gross profit, operating profit and net income?

    Learn about the relationship between gross profit, operating profit and net income and how these financial concepts are calculated. Read Answer >>
  4. What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between ... Read Answer >>
  5. What are the differences between operating profit and operating income?

    Learn how operating income, also known as operating profit, is determined. Also, see how investors use this number on the ... Read Answer >>
  6. Is net income the same as profit?

    Understand the difference between profit and net income, including why corporate accountants calculate profit at different ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center