What Is Profit?
Let me tell you directly: profit is what a company has left when its revenue beats out all the costs and expenses over a period like a quarter or a fiscal year. It's straightforward—it's the surplus you keep after paying for everything needed to produce or sell your products or services. You'll encounter different kinds: gross profit comes after subtracting the cost of goods sold (COGS), operating profit factors in day-to-day activities without interest or taxes, and net profit is the final amount after all costs. If your company is highly profitable, you're in a strong position to handle costs and obligations. Often, businesses share these profits with shareholders or plow them back into operations.
Key Takeaways
- Profit is the money companies retain after all expenses are paid.
- Gross profit equals sales minus the cost of goods sold.
- Operating profit includes expenses like overhead and depreciation.
- Net profit is known as the bottom line.
- Companies can pay profits as dividends to shareholders or reinvest them in the business.
How Profit Is Calculated
Profit is simply the revenue minus all expenses—whether you're running a small lemonade stand or a massive multinational, the goal is to make money this way. Some focus on top-line profitability, others on figures before taxes, and some only care about the end result after everything's deducted. You'll find the three key types—gross, operating, and net—on the income statement, and each gives you insights into how the company stacks up against competitors.
Gross Profit
Start with gross profit: it's sales minus the cost of goods sold, the first profitability level. On the income statement, sales sit at the top, with COGS right below. The formula is Gross Profit = Revenues - COGS. Take Company A with $100,000 in sales and $60,000 COGS—that leaves $40,000 gross profit. Divide that by sales for a 40% gross profit margin.
Operating Profit
Next, operating profit strips out operating expenses like overhead, indirect costs, depreciation, and amortization. It's often called earnings before interest and taxes (EBIT). The calculation is Operating Profit = Revenue - COGS - Operating Expenses - Depreciation & Amortization.
Net Profit
Net profit is what you get after subtracting interest and taxes from EBIT: Net Profit = EBIT - Interest Expense - Taxes. It lands at the bottom of the income statement, hence the 'bottom line' label. This figure tells you the company's profitability over a period and what's available for dividends or retained earnings, which can pay debts, fund projects, or reinvest.
How Do Public Companies Report Profit?
Public companies must disclose their financials in an annual Form 10-K report to the U.S. Securities and Exchange Commission. This gives you a clear view of their operating and financial results for the year.
What Is the History of Profit?
In capitalist systems, where firms compete to sell goods, economists have long studied profits. Karl Marx saw them as surplus from workers' labor taken by owners. Modern views say profits reward the risks entrepreneurs take. Others point to inefficient markets and imperfect competition as sources.
What Is the Corporate Tax Rate on Profits?
As of 2025, the corporate tax rate on profits stands at 21%, down from 35% after the 2017 Tax Cuts and Jobs Act.
The Bottom Line
Profit boils down to revenue minus expenses, but you can break it down further. Gross profit subtracts manufacturing costs from earnings, operating profit deducts operational expenses, and net profit accounts for everything including interest and taxes. An increasing bottom line signals growth; a shrinking one is a warning sign.
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