What is Operating Profit

by Investing School on May 28, 2010

Operating profit refers to the profit that is earned through a company’s business activities and operations. It is also commonly known as the “earnings before interest and tax” or EBIT. It can also be described as the surplus or overage of cash after paying all the costs that are associated with running the business. For example, this would include all the aspects related to the production and selling of a product. It should not be confused with sales revenue. Sales revenue is the money that is received from selling the actual product or service.

Calculating operating profit can be done in this way. You take the Expenses from Operations and subtract it from the Revenue from Operations. This will give you the operating profit number.

Here is a further example. Let’s suppose you have a business in making and selling donuts. We will call the business Al’s Donuts. Let’s say that Al’s Donuts takes in $50 million from its operations (that’s a lot of donuts), $10 million from having a 40% share in ABC Corp and an additional $3.5 million that is earned from interest off of its money market and bank accounts. The company only spends $10 million per year to cover its operation costs.

The company’s operating profit is $40 million. This is done by taking the $50 million and subtracting the $10 million from the operating costs. Even though you have ancillary income that is part of the company’s profits you would not include them because they are considered investment income.

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