A company’s operating profit is its total earnings from its core business functions for a given period. Put simply, operating profit is a company’s net income from its core operations after accounting for operating expenses. Operating profit excludes the deduction of interest and taxes, as well as any profits earned from ancillary investments.
Key Takeaways
- Operating profit is the net income derived from a company’s primary or core business operations.
- Operating profit does not include non-operating income, but EBIT does.
- It eliminates several extraneous and indirect factors that can obscure a company’s real performance.
- A company’s operating profit margin shows how well a company turns gross revenue into this figure.
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 = Revenue - Cost of Goods Sold (COGS)
Operating profit is also referred to colloquially as Earnings Before Interest and Tax (EBIT). However, EBIT can include non-operating revenue, which is not included in operating profit. If a company doesn’t have non-operating revenue, EBIT and operating profit will be the same figure.
Understanding Operating Profit
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. This is why operating profit takes into account asset-related depreciation and amortization—accounting tools that result from a firm’s operations.
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 the net profit reflects.
While positive operating profit may express the overall health of a business, it does not guarantee future profitability. For instance, a company with a high debt load may show a positive operating profit while simultaneously experiencing net losses.
Operating Profit: Non-Operating Income and Expenses Exclusions
| Non-Operating Income | Non-Operating Expenses |
|---|---|
| Asset sales | Interest from debt obligations |
| Dividend and investment income | Inventory write-offs |
| Foreign exchange transaction income | Legal settlements |
Special Considerations
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.
While the removal of production costs from overall operating revenue—along with any costs associated with depreciation and amortization—is permitted when determining operating profit, the calculation does not account for any liabilities that must be met. This holds true 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.
Operating Profit vs. Other Profit Measures
Operating profit is one metric used to determine a company’s profitability from its core operations. Other metrics may seem the same but shouldn’t be confused. Here are some common comparisons:
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. Companies report their gross profit on their income statement. It’s calculated as follows:
Gross Profit = Revenues - COGS
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. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
Operating profit is an accounting metric for those focused on operational profitability. EBITDA, however, is a cash-focused metric for stakeholders interested in the cash flow of the business. EBITDA is calculated by adding interest, depreciation, and amortization back to operating profit:
EBITDA = Operating income + Depreciation + Amortization
Operating Profit vs. Net Profit
Net profit is the profit remaining after all costs incurred within the period have been subtracted from revenue generated from sales. Expenses factored into net income but not operating profit include debt payments, interest on loans, and one-time payments for unusual events such as lawsuits.
Additional income considered in net income includes interest earned on investments and funds from the sale of assets not associated with primary operations.
Example of Operating Profit
Walmart reported operating income of $27.01 billion for its fiscal year 2024. Total revenues were $648.12 billion. These revenues came from sales across Walmart’s global umbrella of physical stores and its e-commerce businesses.
Meanwhile, COGS and operating, selling, general, and administrative expenses totaled $490.14 billion and $130.97 billion, respectively.
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. This includes asset-related depreciation and amortization, which result from a firm’s operations.
How Do You Calculate Operating Profit?
Operating profit is calculated by taking revenue and then subtracting COGS, operating expenses, depreciation, and amortization.
How Do You Find the Operating Profit Margin?
Operating profit (or operating income) can be found on the income statement or calculated as:
- Revenue - COGS - Operating Expenses - Depreciation - Amortization
It’s the profit left after deducting the costs of running the business. The operating profit margin is calculated by dividing operating income by revenue.
What Is Excluded From the Operating Profit?
Revenue from the sale of assets is not included in the operating profit figure, except for items created to be sold as part of the core business. Additionally, interest earned from cash like checking or money market accounts is not included. Debt obligations are also excluded from this calculation.
The Bottom Line
Operating profit looks at a company’s earnings generated from normal business operations. Analyzing operating profit, found on the income statement, is useful because it excludes 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.
Related Terms: Gross Profit, EBIT, EBITDA, Cost of Goods Sold, Operating Expenses.
References
- Walmart. “Walmart Reports Fourth Quarter Results”, Page 8.
- Walmart. “Form 10-K”, Page 41.
