Next video:
Loading the player...

Operating profit, also known as operating income, is a measure of a company’s efficiency. It is the profit generated from the core business of a company before accounting for interest and taxes. In accounting terminology, operating profit is known as earnings before interest and taxes (EBIT).

The operating profit for a business like Giacomo's Pizza is going to be the pre-tax profit generated from selling pizzas - which is the core business of the company. Remember, earnings not directly related to the core business operations are not included when calculating operating profit. The earnings that will be left out of the calculation are: income from the company's investments, capital gains on asset sales, rental income, bank account interest, miscellaneous earnings like fees, dividends, and so on.   

Operating profit is calculated as:

Operating Profit = Operating Revenue – Cost of Goods Sold (COGS) – Operating Expenses – Depreciation

Here, operating revenue is the income from the company’s core business operations. COGS, or cost of goods sold, is the cost incurred in manufacturing and selling the company’s products. Operating expenses include expenses related to sales, marketing, R&D, administration, restructuring, etc. Depreciation accounts for the decrease in the value of the assets over time.

Consider the income statement of Giacomo's Pizza.

Giacomo’s Pizza Ltd

Revenue

$2,000,000

Interest earned in bank accounts

$80,000

Earning from 30% stake in Yes Beverages Ltd.

$1,000,000

Cost of Goods Sold (COGS)

$1,000,000

Labor

$400,000

General & administrative expenses

$50,000

 

Based on the information, the operating profit for Giacomo’s Pizza will be,

Operating Profit = $2,000,000 - $1,000,000 - $400,000 - $50,000 = $550,000

The sum of $80,000 and $1,000,000 is not included because it is income from investments, not from selling pizzas. 

Operating profit helps gauge the health of a company's core business and is one of the important factors to consider when an investor is looking to pick the company’s stock. Using this measure for comparison makes the most sense when comparing companies within the same industry. If a company is experiencing a decline in its operating profit, this reflects that there is less money for future expansion, paying off debt burden, etc. Operating profit shows the profits from a company’s core business that are not diluted with income from any other source, and thus reveals a lot about the profit-generating capacity of the management.

  1. No results found.
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

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
  3. Investing

    Operating Income

    Amount of profit realized from a business's operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation.
  4. Investing

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  5. Small Business

    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

    What is Operating Revenue?

    Operating revenue is income that’s derived from sources related to a company’s everyday business operations.
  8. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  9. Investing

    Understanding the Income Statement

    The best way to analyze a company—and figure out if it's worth investing in—is to know how to dissect its income statement. Here's how to do it.
  10. Small Business

    Understanding Product Lines

    A product line is a group of related products manufactured by the same company.
Hot Definitions
  1. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  2. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  3. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
Trading Center