Technicals Stability Returns

Understanding Operating Profit

In a given period, operating profit is the income that comes from core business operations excluding interest and taxes. It also excludes profits earned as a result of ancillary investments, such as earnings from another business in which a company has a partial interest. When core business income falls below expenses, an operating loss occurs.

Formula for Operating Profit
Operating Profit

Key Highlights.

Operating income comes from the core operations of the business.

Operating income is also called EBIT but be careful, operating income does not include other income.

Company's operating profit is a subtotal listed on its income statement after all general and administrative expenses, and before interest income and interest expense, and taxes.

Interpretation of Operating Profit

Operating income is refer to income than earn from the core operation of the business excluding interest and tax expenses

This concept is used to identify the profit-making ability of a company excluding all irrelevant elements for a core business like interest expenses and tax expenses. Operating profit is particularly important when analysts or investors want to monitor companies' trends to see how a business is performing in a historical period.

If operating income is negative, a business will likely require additional outside funding to remain in operation.

Cash flows generated by a business are not necessarily equal to operating profits, since the accounting entries made under the accrual basis of accounting can result in substantially different operating profits.

Use of Operating Profit ratio

Operation profit measures the company's profit before deducting interest and tax expenses.

Operation profit is not limited to its calculation. It is also used as input while calculating financial ratios. For example Operating Profit Margin etc.

Operation profit to get an idea about whether a company is able to generate profit from its core business.

Importance of Operating profit

Operating profit shows the amount available in the company to pay interest, pay tax and pay shareholders their share of a dividend.

Operating profit is the essential figure because this indirectly shows the efficiency of the business. Higher operating profit is the more profitable company's core business.

Operating profit is affected by several factors for example pricing strategy, raw material price, and labor cost. Because these items are directly related to the day-to-day business decision that management makes. Operating profit also measures managerial flexibility during a tough time.

Limitation of Operating Profit

Operating profit of a company does not give an accurate picture because after operating profit there are several expenses like interest expenses tax expenses etc. Even having an Operating profit company may suffer from net loss.

Operating profit solely cannot be compared with other industries' companies Operating profit can be manipulated by fraudulent accounting practices.

Related Operating Profit Screener
Income Statement Screener 1Y CAGR Growth 3Y CAGR Growth 5Y CAGR Growth 7Y CAGR Growth 10Y CAGR Growth