Profit

Key takeaways

• Profit is the surplus a company retains after paying its costs and expenses.
• Gross profit = Revenues − Cost of Goods Sold (COGS).
• Operating profit (EBIT) subtracts operating expenses, depreciation, and amortization from gross profit.
• Net profit (the “bottom line”) subtracts interest and taxes from operating profit.
• Profits can be distributed as dividends or retained for debt repayment, projects, or reinvestment.

What is profit?

Profit is the amount a business keeps after covering all costs required to produce and sell its goods or services during a reporting period. Different profit measures—gross, operating, and net—highlight profitability at successive stages of the income statement and help analysts compare performance across firms.

How profit is calculated

Profit figures appear on the income statement and reflect different layers of expense recognition:
* Gross profit focuses on direct production costs.
Operating profit includes indirect and recurring business expenses.
Net profit accounts for financing costs and taxes.

Gross profit

Definition: Gross profit shows how much remains from sales after subtracting the direct costs of producing goods or services (COGS).

Formula:
Gross Profit = Revenues − COGS

Example: If sales are $100,000 and COGS is $60,000, gross profit = $40,000.
Gross profit margin = Gross Profit ÷ Revenues = $40,000 ÷ $100,000 = 40%.

Operating profit (EBIT)

Definition: Operating profit measures earnings from core business activities, excluding financing and tax effects. It accounts for overhead, selling and administrative expenses, and non-cash charges like depreciation and amortization.

Formula:
Operating Profit (EBIT) = Revenues − COGS − Operating Expenses − Depreciation & Amortization

Operating profit indicates how efficiently a company runs its day-to-day operations.

Net profit (the bottom line)

Definition: Net profit is the final profit remaining after subtracting interest and taxes from operating profit. It represents what’s available for dividends and retained earnings.

Formula:
Net Profit = EBIT − Interest Expense − Taxes

A rising net profit generally signals company growth; a shrinking net profit can indicate problems such as rising costs, falling sales, or higher financing expenses.

How public companies report profit

Public companies disclose financial statements—showing gross, operating, and net profit—in regulatory filings (for example, annual reports and filings required by securities regulators). These documents provide a detailed view of operating and financial performance for investors and regulators.

Perspectives on profit

Economists and theorists have different explanations for profit:
* Classical and neoclassical views often treat profit as compensation for entrepreneurial risk and capital.
Some theorists (e.g., Karl Marx) viewed profit as arising from surplus value generated by labor.
Modern approaches also consider imperfect competition and market inefficiencies as sources of profit.

Corporate tax on profits

The U.S. federal corporate income tax rate is 21%, a rate established by the 2017 Tax Cuts and Jobs Act. (Companies may face additional state and local taxes.)

Bottom line

Profit is measured at multiple levels on the income statement to reveal how revenue translates into retained earnings after different types of costs. Gross profit reflects production efficiency, operating profit shows operational performance, and net profit reveals the company’s final financial return after financing and tax obligations. Understanding all three helps assess a company’s financial health and decision-making capacity.

Fast fact: The word “profit” comes from the Latin profectus, meaning “progress,” and proficere, meaning “to advance.”