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In addition to net profit, most analysts look at a company’s gross profit and operating profit to gauge performance. Investors can use these measures to determine whether trends are likely to continue.

The income statement shows a company’s revenues and expenses for a specific time. Let’s look at an income statement from Active Tots.

(in millions)

2012

2011

Net Sales

2,000

1,800

Cost of Goods Sold

(900)

(700)

Gross Profit

1,100

1,100

Operating Expenses (SG&A)

(400)

(250)

Operating Profit

700

850

Other Income (Expense)

(100)

50

Extraordinary Gain (Loss)

400

(100)

Interest Expense

(200)

(150)

Net Profit Before Taxes (Pretax Income)

800

650

Taxes

(250)

(200)

Net Income

550

450

The top line shows its revenue or net sales. Gross profit is net sales minus expenses associated with making its toys. From gross profit, subtract operating expenses, which include selling, general and administrative expenses, to get the operating profit.

Next, factor in other considerations that are not related to the firm’s core business. Extraordinary gains and losses could be the sale of a division or building. There are also gains and losses from investments and interest. Deduct these additional expenses and taxes to get the net income, whether profit or loss. This is the money a company has added or subtracted to its coffers.

While Active Tot’s net income grew from $450 million to $550 million, a closer look reveals some interesting developments. Cost of goods sold grew at a faster pace than net sales, and operating profit went down in the latest year. In the most recent year, Active Tots recorded an extraordinary $400 million gain from selling its educational products division.

Net profits were up, but not from income the company counts on. That’s why analyzing operating profit is so important.

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