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Overview of Operating Profit
Definition of
Operating Profit
What is Operating Profit? Operating Profit, also commonly known as Operating Income or Net Operating Income (NOI), is a measure of profit a company earns from its core, ongoing business operations. It is calculated by subtracting Operating Expenses (OPEX) and the Cost of Goods Sold (COGS) from total Revenue. Alternatively, it can be calculated as Gross Profit minus Operating Expenses. Operating Profit does not include income from investments or the effects of interest expense or taxes.
Activities Related to
Operating Profit
Here is a list of Operating Profit related activities:Â Calculating Gross Profit, Identifying and summing all Operating Expenses, Applying the operating profit formula, Analyzing the profitability of core business functions, Comparing operating profit to revenue (to derive the Operating Profit Margin), Using operating profit figures for internal performance assessment and strategic decision-making, and Presenting operating profit on the Income Statement.
The Importance of
Operating Profit
Operating Profit is important because it provides a clear indication of how well a company's core business activities are performing financially, independent of its financing structure (interest) and tax situation. A healthy and growing operating profit suggests that the company is efficient in its main operations and that its products or services are profitable. This metric is closely watched by investors and analysts to gauge the fundamental earning power and operational efficiency of a business. For owners, it highlights the profitability of day-to-day operations before considering non-operational factors, which is vital for strategic planning and ensuring the long-term viability of the business. It is a stepping stone to calculating Net Income.
Key Aspects of
Operating Profit
Focus on Core Operations
Reflects earnings purely from the company's primary business activities.
Excludes Non-Operating Items
Does not include income or expenses from financing activities (like interest expense) or taxes.
Calculation
Derived by subtracting all Operating Expenses (including COGS and SG&A) from total operating Revenue.
Indicator of Operational Efficiency
Shows how effectively a company manages its resources and controls costs in its main line of business. Often used to calculate the Operating Profit Margin.
Concepts Related to
Operating Profit
Operating Profit is a key figure on the Income Statement, representing the profit before non-operating income/expenses, interest, and taxes. It is synonymous with Operating Income and Net Operating Income (NOI). It follows Gross Profit in the income statement calculation and precedes Net Income. Operating Profit is also closely related to Earnings Before Interest and Taxes (EBIT) and is a component in calculating EBITDA.
Operating Profit
in Action:
The Adventures of Coco and Cami
Coco and Cami are analyzing their monthly financial reports. They see their sales, subtract the cost of ingredients, and then subtract all their shop running costs like rent and utilities.
Professor A explains that the number they're left with before considering any loan interest or income taxes is their Operating Profit – a key indicator of how well their core business is doing.