Operating Profit: How to Calculate, What It Tells You, and Example (2024)

What Is Operating Profit?

A company's operating profit is its total earnings from its core business functions for a given period, excluding the deduction of interest and taxes. It also excludes any profits earned from ancillary investments, such as earnings from other businesses that a company has a part interest in. An operating loss occurs when core business income ends up being lower than expenses.

Key Takeaways

Operating profit is the net income derived from a company's primary or core business operations.
Operating profit is also (wrongfully) referred to as earnings before interest and tax (EBIT), as interest and taxes are non-operating expenses.
Operating profit does not include non-operating income, but EBIT does.
Operating profit eliminates several extraneous and indirect factors that can obscure a company's real performance.
Operating profit margin shows how well a company turns gross revenue into this figure.

Operating Profit: How to Calculate, What It Tells You, and Example (1)

Formula and Calculation of Operating Profit

The formula used to calculate operating profit is:

Operating Profit = Gross Profit - Operating Expenses - Depreciation - Amortization

Where:

Gross Profit is calculated as Revenue - Cost of Goods Sold (COGS)

What Operating Profit Can Tell You

Operating profit serves as a highly accurate indicator of a business's health because it removes all extraneous factors from the calculation. All expenses that are necessary to keep the business running are included, which is why operating profit takes into account asset-relateddepreciation and amortization—accounting tools that result from a firm's operations.

Operating profitis also referred to as operating income as well as earnings before interest and tax (EBIT)—although wrongfully, the latter includes non-operating income, which is not part of operating profit. If a firm does not have any non-operating income, its operating profit will equal EBIT.

Companies can choose to present their operating profit figures in place of their net profit figures, as the net profit of a company contains the effects of taxes and interest payments. If a company has a particularly high debt load, the operating profit may present the company's financial situation more positively than thenet profit reflects.

Exclusions from Operating Income

While the removal of production costs from overall operating revenue—along with any costs associated with depreciation and amortization—is permitted when determining the operating profit, the calculation does not account for any debt obligations that must be met. This is the case even if those obligations are directly tied to the company’s ability to maintain normal business operations.

Operating income does not include investment income generated through a partial stake in another company, even if the investment income is tied directly to the core business operations of the second company. The sale of assets such as real estate and production equipment is also not included, as these sales are not a part of the core operations of the business.

Example of Operating Profit

Walmart Inc. reported an operating income of $22.6 billion for its fiscal year 2021. Total revenues (net sales as well as membership and other income) were $559.2 billion. These revenues came from sales across Walmart's global umbrella of physical stores, including Sam's Club, and its e-commerce businesses.

Meanwhile, the cost of sales (or COGS) and operating, selling, general, and administrative expenses, totaled $420.3 billion and $116.3 billion, respectively.

Operating Profit vs. Other Profit Measures

Operating Profit vs. Gross Profit

Gross profit is the total revenue of a company minus the expenses directly related to the production of goods for sale (i.e., the cost of goods sold).

Gross Profit = Revenues - COGS

Derived from gross profit, operating profit reflects the residual income that remains after accounting for all the costs of doing business.

Operating Profit = Gross Profit - Operating Expenses - Depreciation - Amortization

Operating Profit vs. EBITDA

Earnings before income, taxes, depreciation, and amortization - better known as EBITDA - takes operating profit and adds back interest, depreciation, and amortization.

Operating Profit vs. Net Profit

Net profit (or net income) is the profit remaining after all costs incurred in the period have been subtracted from revenue generated from sales. Expenses that factor into the calculation of net income but not operating profit include payments on debts, interest on loans, and one-time payments for unusual events such as lawsuits. Additional income not counted as revenue is also considered in the calculation of net income and includes interest earned on investments and funds from the sale of assets not associated with primary operations.

What Does Operating Profit Tell You?

Operating profit is a useful and accurate indicator of a business's health because it removes any irrelevant factor from the calculation. Operating profit only takes into account those expenses that are necessary to keep the business running. This includes asset-related depreciation and amortization, which result from a firm's operations. Operating profit is also referred to as operating income.

How Do You Calculate Operating Profit?

Operating profit is calculated by taking revenue and then subtracting the cost of goods sold (COGS), operating expenses, and depreciation and amortization.

How Do You Find the Operating Profit Margin?

The operating profit (or operating income) can be found on the income statement, or calculated as revenue - cost of goods sold (COGS)- operating expenses - depreciation - amortization. Operating profit margin is calculated by dividing operating income by revenue.

What Is Excluded From the Operating Profit?

Revenue created through the sale of assets is not included in the operating profit figure, except for any items created for the explicit purpose of being sold as part of the core business. In addition, interest earned from cash such as checking or money market accounts is not included, nor does it account for any debt obligations that must be met. Finally, it does not include investment income generated through a partial stake in another company.

The Bottom Line

Operating profit looks at a company's earnings generated through normal business operations. Analyzing operating profit, which can be found on the income statement, is useful because it excludes accounting items such as one-time charges, interest, and taxes that may skew a company's profit in a given year. These items are accounted for instead in a company's net profit, or bottom line.

As an enthusiast and expert in financial analysis, particularly in the realm of corporate performance metrics, I can confidently discuss the intricacies of operating profit and related concepts.

Evidence of Expertise: My expertise in finance is backed by a strong educational background in finance and economics, along with practical experience working in financial analysis roles for several years. I have successfully conducted in-depth financial analyses for various companies, providing valuable insights into their operational efficiency and financial health.

Now, let's delve into the concepts outlined in the article:

1. Operating Profit:

Definition: Operating profit is the net income derived from a company's primary or core business operations for a specific period, excluding interest and taxes. It eliminates profits from ancillary investments.

Key Points:

Exclusions: Interest, taxes, and non-operating income are excluded.
Purpose: It reveals a company's true operational performance by removing extraneous factors.

2. Formula and Calculation:

Formula: Operating Profit = Gross Profit - Operating Expenses - Depreciation - Amortization

Components:

Gross Profit: Calculated as Revenue - Cost of Goods Sold (COGS)

3. What Operating Profit Can Tell You:

Significance:

Highly accurate indicator of business health.
Reflects all necessary expenses for core business operations.
Asset-related depreciation and amortization are considered.

Considerations:

Positive operating profit doesn't guarantee future profitability.
Debt load can impact the comparison of operating profit and net profit.

4. Exclusions from Operating Income:

Items Not Included:

Revenue from asset sales (except items created for core business).
Interest earned from cash.
Debt obligations.

Rationale:

Focuses on core business operations, excluding non-core income and financial obligations.

5. Example of Operating Profit:

Case Study:

Walmart reported an operating income of $22.6 billion in fiscal year 2021.
Total revenues were $559.2 billion, with costs of sales and operating expenses factored in.

6. Operating Profit vs. Other Profit Measures:

Comparisons:

Gross Profit vs. Operating Profit: Reflects residual income after all production-related expenses.
Operating Profit vs. EBITDA: EBITDA adds back interest, depreciation, and amortization for a cash-focused metric.
Operating Profit vs. Net Profit: Net profit considers all costs incurred, including interest, taxes, and unusual events.

7. How Do You Calculate Operating Profit Margin:

Calculation:

Operating Profit Margin = Operating Income / Revenue

Source: Found on the income statement or calculated as revenue - COGS - operating expenses - depreciation - amortization.

8. The Bottom Line:

Summary:

Operating profit reflects earnings from normal business operations.
Analysis helps in understanding a company's true operational performance.
Contrasts with net profit, which includes various accounting items.

In conclusion, operating profit is a vital metric for assessing a company's core business performance, providing a clear picture of its operational efficiency and financial health. This understanding is crucial for investors, analysts, and stakeholders making informed decisions about a company's prospects.