Operating profit is profit from a company’s ordinary revenue-producing activities.
Operating profit = (A) Gross profit – (B) Operating expenses
How to Calculate Operating Profit
Operating profit shows how much profit a business generates from its core operations before interest and income taxes are taken into account.
To calculate operating profit, subtract operating expenses from gross profit:
Operating Profit = Gross Profit − Operating Expenses
For example, if a company has a gross profit of $100,000 and operating expenses of $60,000:
Operating Profit = $100,000 − $60,000 = $40,000
The company’s operating profit is $40,000.
What Are Operating Expenses?
Operating expenses are the costs a business incurs through its normal operations. They may include expenses such as salaries and wages, rent, utilities, insurance, marketing, and administrative expenses.
Interest expense and income taxes are generally not included when calculating operating profit.
Operating Profit vs. Gross Profit
Gross profit and operating profit measure different levels of profitability.
Gross profit is the amount remaining after the cost of goods sold is deducted from revenue.
Operating profit goes one step further by also deducting operating expenses from gross profit.
For example:
Revenue: $150,000
Cost of goods sold: $50,000
Gross profit: $100,000
Operating expenses: $60,000
Operating profit: $40,000
Why Is Operating Profit Important?
Operating profit helps show how profitable a company’s core business activities are. Because it focuses on operating activities, it can be useful for evaluating operating performance without the effects of financing costs and income taxes.
Frequently Asked Questions
Is operating profit the same as net profit?
No. Operating profit reflects profit from business operations before interest and income taxes, while net profit takes these and other non-operating items into account.
Is operating profit the same as EBIT?
Operating profit and EBIT are often similar, but they are not necessarily identical. EBIT may include certain non-operating income or expenses, depending on how it is calculated.
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