What is operating profit?
Operating profit is accounting data to calculate the total profit earned from a corporation's core business. Interest and tax deductions are excluded from the measurement. It also excludes any other earnings from individual companies the corporation has taken part or invested in. Operating losses occur if the income from the core business is lower than its expenses.
What does Operating Profit tell about the company, and how to calculate it?
Operating profit is a reliable measure of a business's health because it excludes all irrelevant factors from the calculation. It includes all expenses essential for the business to operate, such as asset-related depreciation and amortization—accounting tools that arise from a firm's operations.
Operating profit can also be called operating income or earnings before interest and tax (EBIT)—although incorrectly, as the latter includes non-operating income, which is not part of operating profit. If a firm has no non-operating income, its operating profit will equal EBIT.
Operating profit is calculated by subtracting the cost of goods sold (COGS) and operating expenses from the revenue. COGS are the direct costs of producing or selling products or services, such as raw materials, labor, and overhead. Operating expenses are indirect business costs, such as rent, utilities, payroll, and depreciation. Operating profit excludes income or expenses unrelated to the company's main operations, such as interest income, dividend income, or interest expense.