What Is Operating Profit?
Operating profit (also called operating income) measures how much profit a company generates from its core business operations, after paying the costs necessary to produce and sell goods or services and to run the business. It excludes financing costs (interest), taxes and most non‑operating items (for example, gains or losses from selling investments or property).
Key takeaways
– Operating profit shows earnings from normal operations, excluding interest and taxes.
– It is an important indicator of operational efficiency and core profitability.
– Operating profit is closely related to EBIT (earnings before interest and taxes); they match when there is no non‑operating income.
– Use operating profit and operating profit margin to compare companies’ operational performance over time or against peers, but adjust for one‑time items and accounting differences.
Formula and calculation of operating profit
Operating profit can be found on the income statement or computed as:
Operating profit (Operating income) = Revenue − Cost of goods sold (COGS) − Operating expenses − Depreciation − Amortization
Alternatively, start from gross profit:
Gross profit = Revenue − COGS
Operating profit = Gross profit − Operating expenses − Depreciation − Amortization
Operating profit margin = Operating profit ÷ Revenue (usually expressed as a percentage)
Understanding operating profit
– What it includes: revenue from core operations, costs of goods sold, selling, general & administrative (SG&A) expenses, and operating depreciation and amortization. These are expenses necessary to run the business.
– What it excludes: interest expense and interest income, income taxes, and most non‑operating gains or losses (for example, proceeds from selling investments or property that are not part of core operations), and sometimes income from equity investments that are classified as non‑operating.
– Relationship to EBIT: Operating profit is often the same as EBIT, but EBIT can include non‑operating income in some presentations; if a company has no non‑operating items, EBIT = operating profit.
Special considerations and limitations
– Non‑cash vs cash focus: Operating profit includes non‑cash charges such as depreciation and amortization; EBITDA (see below) strips those out to give a more cash‑flow oriented view.
– Accounting choices matter: Depreciation method, capitalization policies, and classification of certain costs (e.g., R&D capitalized vs expensed) can affect operating profit and comparability across firms.
– One‑time items: Restructuring charges, impairment losses or one‑off gains may be included in operating results (if related to operations) and can distort recurring operating profitability. Adjust for such items when analyzing trends.
– Not a measure of overall profit: Because it excludes financing costs and taxes, a company can show positive operating profit while still producing a net loss if interest or taxes are large.
Operating profit vs. other profit measures
– Operating profit vs. gross profit: Gross profit = revenue − COGS. Gross profit measures margin on production or purchase of goods only. Operating profit deducts operating expenses (e.g., SG&A) and depreciation/amortization, reflecting the profitability of the whole operating business.
– Operating profit vs. EBITDA: EBITDA = Operating profit + Depreciation + Amortization (or Net income + Interest + Taxes + Depreciation + Amortization). EBITDA focuses on cash operating performance by removing non‑cash D&A and sometimes provides a proxy for operating cash flow (but still ignores capex, working capital and tax/interest cash flows).
– Operating profit vs. net profit: Net profit (net income) = operating profit − interest expense + interest income − taxes ± non‑operating items. Net profit is the “bottom line” after financing and tax effects; operating profit isolates the core business operating performance.
Example (Walmart, fiscal year 2024)
Given (rounded):
– Revenue (total) = $648.12 billion
– Cost of sales (COGS) = $490.14 billion
– Operating, selling, general & administrative expenses = $130.97 billion
Calculation:
– Gross profit = Revenue − COGS = 648.12 − 490.14 = $157.98 billion
– Operating profit = Gross profit − Operating expenses = 157.98 − 130.97 = $27.01 billion (reported operating income)
– Operating profit margin = 27.01 ÷ 648.12 ≈ 4.2%
What operating profit tells you
– Operational efficiency: It indicates how well a company converts revenue into profit from its core activities after covering operating costs.
– Comparability: Useful for comparing profitability across companies in the same industry (adjust for scale, accounting policies and business model differences).
– Management performance: Trends in operating profit and operating margin reveal whether management is controlling costs and growing profitable revenue.
– Not the full picture: Since it excludes financing and tax effects, it doesn’t show how much profit is ultimately available to shareholders.
How to calculate operating profit — practical steps
1. Obtain the company’s income statement for the period (quarterly or annual financial statements).
2. Note total revenue (or net sales).
3. Subtract cost of goods sold (COGS) to get gross profit.
4. Subtract operating expenses (SG&A, R&D if expensed) and operating depreciation and amortization to arrive at operating profit.
– If depreciation and amortization are listed separately, subtract them; otherwise they may already be included in operating expenses.
5. Compute operating margin = Operating profit ÷ Revenue.
6. Check the notes and management discussion for one‑time items, reclassifications, or non‑operating income that might explain differences between EBIT and operating income.
How to find operating profit in reports
– Look on the income statement for a line labeled “Operating Income,” “Operating Profit,” or “Income from Operations.” If not shown explicitly, calculate it as described above.
– Read the footnotes for definitions — some companies present non‑recurring operating items separately (e.g., “operating income before restructuring”).
What’s excluded from operating profit
– Interest expense and interest income (financing items)
– Income taxes
– Gains/losses from asset sales or investments unrelated to core operations
– Investment income from non‑core stakes (unless classified as operating)
– Extraordinary financing or tax items
Practical steps for analysis (for investors, managers, analysts)
1. Calculate and trend operating profit and operating margin across several periods to identify direction and volatility.
2. Compare margins to peers and industry averages; adjust for business model differences (retail vs. software vs. manufacturing).
3. Adjust for one‑off items and unusual charges to measure underlying recurring operating performance.
4. Reconcile operating profit with cash flow: compare with operating cash flow and free cash flow to assess conversion of operating profit into cash.
5. Investigate drivers: revenue growth, pricing, input costs (COGS), SG&A discipline, and depreciation policies.
6. Watch for red flags: shrinking operating margin, rising SG&A as a percent of sales, recurring “one‑time” charges, or large non‑operating income masking weak core operations.
7. Use alongside other metrics: combine with EBITDA, net income, ROIC, and cash flow metrics for a fuller picture.
The bottom line
Operating profit is a key measure of a company’s ability to generate profits from its core business operations. It strips out financing and tax effects to focus on operational performance, making it especially useful for comparing companies and tracking management effectiveness. However, it should be used with other measures (EBITDA, net profit, cash flows) and adjusted for accounting differences and one‑time items to draw reliable conclusions.
Sources and further reading
– Investopedia. “Operating Profit.” (source article provided).
– Wall Street Prep. “Operating Profit.”
– CFI Education. “Gross Profit.”
– CFI Education. “EBITDA.”
– Walmart, Form 10‑K, Fiscal Year 2024 (results and income statement figures).
Editor’s note: The following topics are reserved for upcoming updates and will be expanded with detailed examples and datasets.