Operating Profit



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.

Related Articles
  1. Investing

    EBITDA

    Otherwise known as Earnings Before Interest, Taxes, Depreciation and Amortization. Learn more about this indicator of a company's financial performance.
  2. Markets

    A Clear Look At EBITDA

    This measure has its benefits, but it can also present earnings through rose-colored glasses.
  3. Investing Basics

    EBIT (Earnings Before Interest and Taxes)

    Earnings before interest and taxes, or EBIT, takes a company’s revenue, or earnings, and subtracts its cost of goods sold and operating expenses.
  4. Forex

    Trading Currency Intervention for Profit

    Ed Ponsi, president of FXEducator.com, discusses how he incorporates currency intervention into his trading plan.
  5. Markets

    Understanding Profit Margin

    Learn a primary method investors use to analyze a company's profitability.
  6. Options & Futures

    EBITDA: Challenging The Calculation

    This measure has a bad rap, but it's still a valuable tool when used appropriately.
  7. Fundamental Analysis

    Apple Stock: An Earnings Case Study (AAPL)

    Discover an earnings case study on Apple, and learn about its EPS and revenue growth rates, and what analysts are projecting for Apple in 2016 and 2017.
  8. Stock Analysis

    Exxon Mobil Stock: An Earnings Case Study (XOM)

    Explore the recent earnings history of Exxon Mobil. What factors are influencing profits and what do analysts expect for coming years?
  9. Term

    What Is Year Over Year?

    Year over year measures performance in one time period versus performance in a previous time period.
  10. Stock Analysis

    Wal-Mart Stock: An Earnings Case Study (WMT)

    Examine Wal-Mart's earnings history and outlook. Analyze financial data to determine which factors are driving performance and influencing analyst estimates.

You May Also Like

Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center