Operating Profit

Operating Profit

Definition

Operating profit (also called operating income) is the earnings a company generates from its core business operations after deducting the costs required to run the business. It excludes financing costs (interest), taxes, and non-operating or one-time items such as investment income or gains from asset sales.

Why it matters

• Measures how efficiently a company converts revenue into profit from normal operations.
• Removes effects of financing, taxes, and unusual items that can obscure underlying performance.
• A positive operating profit indicates core business viability, but it does not guarantee net profitability once interest, taxes, and one-off costs are included.

Formula and calculation

Operating profit can be expressed two common ways:

Operating Profit = Revenue − Cost of Goods Sold (COGS) − Operating Expenses − Depreciation − Amortization

or equivalently:

Operating Profit = Gross Profit − Operating Expenses − Depreciation − Amortization

Where:
* Gross Profit = Revenue − COGS
* Operating expenses include selling, general, and administrative expenses (SG&A) and other recurring costs of running the business.

Operating profit margin

Operating profit margin shows operational efficiency:

Operating Profit Margin = Operating Profit ÷ Revenue

A higher margin means the company keeps more of each dollar of revenue after covering operating costs.

Relationship to other profit measures

• Gross profit: Revenue minus COGS; does not include operating expenses. Operating profit is derived from gross profit after subtracting operating expenses and asset-related charges.
• EBITDA: A cash-focused metric. EBITDA = Operating Profit + Depreciation + Amortization. EBITDA removes non-cash charges to approximate cash generation.
• EBIT: Often used interchangeably with operating profit, but EBIT can include certain non-operating items. They are equal when non-operating income is zero.
• Net profit: Bottom-line profit after all expenses, including interest, taxes, and non-recurring items. Net profit reflects overall profitability; operating profit isolates core-operational results.

What operating profit excludes

• Interest expense and interest income from cash balances
• Income or gains from investments or the sale of assets outside core operations
• Taxes and one-time or extraordinary items
• Financing obligations or liabilities that affect net profit but are not part of day-to-day operations

Example (summary)

Walmart (fiscal year 2024):
Total revenue: $648.12 billion
Operating income: $27.01 billion
* COGS and operating expenses (combined): substantial portions of revenue (e.g., COGS ≈ $490.14 billion; operating, selling, general & admin ≈ $130.97 billion)
Operating margin ≈ 4.2%, illustrating modest profit retained from core sales after operating costs.

Interpretations and caveats

• Operating profit is a useful indicator of operational health and management effectiveness.
• It can mask financial stress from heavy debt or large non-operating losses — a company can have positive operating profit yet negative net income.
• Compare operating profit and margins across similar companies or periods for meaningful insights, adjusting for accounting differences in depreciation, amortization, and classification of expenses.

Quick answers

• Where is it found? On the income statement, often labeled “operating income” or “operating profit.”
• How to calculate? Subtract COGS, operating expenses, depreciation, and amortization from revenue.
• What does it exclude? Interest, taxes, investment gains/losses, and other non-operating or one-time items.

Bottom line

Operating profit isolates the profitability of a company’s core business by removing financing, tax, and non-operating effects. It’s a key metric for comparing operational performance but should be used alongside other measures (EBITDA, net profit, cash flow) to get a full picture of financial health.