Profit

Profit describes the financial benefit realized when revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity in question. Any profits earned funnel back to business owners, who choose to either pocket the cash or reinvest it back into the business. Profit is calculated as total revenue less total expenses.

Types of Profit
Businesses use three types of profit to examine different areas of their companies. They are gross profit, operating profit, and net profit.

• Gross Profit: Gross profit subtracts cost of goods sold (COGS) from total sales. Variable costs are only those needed to produce each product, like assembly workers, materials, and fuel. It doesn't include fixed costs, like plants, equipment, and the human resources department. Companies compare product lines to see which is most profitable.
• Operating Profit: Operating profit includes both variable and fixed costs. Since it doesn't include certain financial costs, it's also commonly called EBITDA. That stands for Earnings Before Interest, Tax, Depreciation, and Amortization. It's the most commonly used, especially for service companies that don't have products.
• Net Profit: Net profit includes all costs. It's the most accurate representation of how much money the business is making. On the other hand, it may be misleading. For example, if the company generates a lot of cash, and it's invested in a rising stock market, it may look like it's doing well. But it might just have a good finance department and not be making money on its core products.

Companies analyze all three types of profit by using the profit margin. That's the profit, whether gross, operating, or net, divided by the revenue. A high ratio means it generates a lot of profit for each revenue dollar. A low ratio means the company's costs are eating into its profits. Ratios differ according to each industry. Profit margins allow investors to compare the success of large companies versus small ones. A large company will have a lot of profit due to its size. But a small company might have a higher margin, and be a better investment, because it is more efficient. Margins also allow investors to compare a company over time. As the company grows, its profit will grow. But if it's not becoming more efficient, its margin could fall.