Operating profit is a type of profit that comes from company operations. In other words, Operating profit is the company's gross profit minus its operating expenses - to calculate operating profit, subtract operating expenses from gross profit.
Operating profit is used for two main purposes: to calculate the company's tax liability and to give the company an idea of how much profit it is making from its operations.
An example of using operating profit is analyzing a company's ability to generate cash flow from its core Business Operations. If a company consistently has negative operating profit, it may be at risk of defaulting on its debt obligations or having to sell assets to raise cash.
Operating profit is a good way to measure a company's overall profitability, but it is not the only measure. Other measures, such as net profit margin and gross profit margin, can also be useful. The bottom line is that gross profit is just one measure of profitability and should be considered along with other measures when making investment decisions.
The advantages of using operating profit are:
- It provides a clear picture of the company's profitability from its core operations.
- It is not impacted by one-time or non-operational items, making it a more accurate measure of ongoing profitability.
- It can be used to compare the profitability of different companies or different periods for the same company.
The disadvantages of using gross profit are:
- It does not take into account all of the expenses associated with running a business, so it may overstate profitability.
- It can be impacted by one-time items, such as the sale of a piece of equipment, that do not have a significant impact on ongoing profitability.
- It may be difficult to compare the gross profit of different companies because they may use different accounting methods.
Gross Profit is a measure of profitability that includes all revenue from sales minus the cost of goods sold. Operating profit is a measure of profitability that excludes interest and taxes. Net profit is a measure of profitability that includes all revenue and expenses.