What Is Operating Profit?

What Is Operating Profit?

Let me explain operating profit directly: it's the total earnings a company generates from its core business functions over a specific period. Think of it as the net income from those main operations once you've accounted for all the operating expenses. Importantly, it doesn't factor in deductions for interest or taxes, nor does it include profits from side investments, like earnings from partial ownership in other businesses.

If the income from core operations falls below the expenses, you're looking at an operating loss. That's straightforward.

Key Takeaways

Operating profit boils down to the net income from a company's primary business activities. Unlike EBIT, it doesn't include non-operating income. This metric strips away extraneous and indirect factors that might cloud a company's true performance. Finally, the operating profit margin reveals how effectively a company converts its gross revenue into this profit figure.

Formula and Calculation of Operating Profit

Here's the formula you need for calculating operating profit: Operating Profit equals Gross Profit minus Operating Expenses minus Depreciation minus Amortization. And to break it down further, Gross Profit is simply Revenue minus the Cost of Goods Sold (COGS).

Keep in mind that operating profit is sometimes called earnings before interest and tax (EBIT), but there's a catch—EBIT might include non-operating revenue that operating profit leaves out. If there's no non-operating revenue, then EBIT and operating profit will match up exactly.

Understanding Operating Profit

Operating profit gives you a precise view of a business's health by eliminating all the irrelevant elements from the equation. It includes every expense required to keep things running, which is why it factors in depreciation and amortization related to assets—these are direct results of the company's operations.

Companies might choose to highlight their operating profit instead of net profit on reports, especially if high debt makes the net figure look worse due to interest and taxes. A positive operating profit can signal good overall health, but it doesn't promise future profits. For instance, a company burdened with debt could show positive operating profit yet still post net losses. Conversely, large one-off costs might lead to negative net profit while operating profit remains positive.

Operating Profit: Non-Operating Income and Expenses Exclusions

When calculating operating profit, you exclude non-operating income like asset sales, dividend or investment income, and foreign exchange gains. On the expense side, things like interest on debt, inventory write-offs, and legal settlements are also left out.

Revenue from selling assets isn't part of operating profit unless those assets were specifically made to be sold in the core business. Interest from cash accounts doesn't count either. While you subtract production costs, depreciation, and amortization from operating revenue, the calculation ignores any debt obligations, even if they're crucial for maintaining operations. Investment income from stakes in other companies isn't included, nor are sales of assets like real estate or equipment, as these aren't core to the business.

Operating Profit vs. Other Profit Measures

Operating profit is one way to gauge profitability from core operations, but don't mix it up with similar-sounding metrics. Let's compare it to a few.

First, operating profit differs greatly from gross profit. Gross profit is total revenue minus just the costs directly tied to producing goods for sale, like COGS, and it's reported on the income statement. You get it by subtracting COGS from revenues. Operating profit builds on that by subtracting all business costs from gross profit, including operating expenses, depreciation, and amortization.

Next, consider EBITDA, which focuses on cash flow rather than accounting profitability. It starts with operating profit and adds back interest, depreciation, and amortization. Stakeholders interested in cash use EBITDA, while operating profit suits those eyeing operational earnings.

Net profit is the bottom line after subtracting all costs from sales revenue, including debt payments, interest, loans, and unusual one-time expenses like lawsuits. It also adds in non-revenue income, such as investment interest or asset sales not linked to core operations.

Example of Operating Profit

Take Walmart's fiscal year 2024 as an example. They reported an operating income of $27.01 billion. Their total revenues, including net sales and membership income, hit $648.12 billion from stores like Sam's Club and e-commerce. Subtract the cost of sales at $490.14 billion and operating, selling, general, and administrative expenses at $130.97 billion, and you arrive at that operating profit figure.

What Does Operating Profit Tell You?

Operating profit provides a reliable gauge of a business's health by stripping out irrelevant factors. It only considers expenses essential for running the business, including depreciation and amortization from operations. You might hear it called operating income.

How Do You Calculate Operating Profit?

To calculate it, start with revenue and subtract COGS, operating expenses, depreciation, and amortization.

How Do You Find the Operating Profit Margin?

You'll find operating profit on the income statement, or calculate it as revenue minus COGS, operating expenses, depreciation, and amortization. It's the profit after business running costs. For the margin, divide operating income by revenue.

What's Excluded From the Operating Profit?

Asset sale revenue isn't included unless the assets were made specifically for sale in the core business. Interest from cash accounts is out, as are debt obligations. Investment income from partial stakes in other companies doesn't count either.

The Bottom Line

Operating profit examines earnings from normal business operations, found on the income statement. It's valuable because it ignores one-time charges, interest, and taxes that can distort yearly profits—these show up in net profit instead.