Operating profit, also known as operating income or operating earnings, is a measure of a company’s profitability from its core business operations. It represents the profit generated from the company’s primary activities before deducting interest and taxes.
To calculate operating profit, you typically start with the company’s revenue and then subtract its operating expenses. Operating expenses include costs directly related to producing and selling goods or services, such as:
- Cost of goods sold (COGS): The direct costs associated with producing goods or services, including materials, labor, and overhead.
- Selling, general, and administrative expenses (SG&A): These expenses include marketing costs, salaries for administrative staff, rent, utilities, and other overhead expenses.
The formula for operating profit is:
Operating Profit = Revenue – Operating Expenses
Operating profit is a key financial metric that provides insight into how efficiently a company is generating profits from its core operations. It helps investors and analysts assess the company’s operational performance and profitability independent of financing decisions (interest) and tax considerations.
- Operating income, also known as earnings before interest and taxes (EBIT)
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