Operating profit

Revenue less cost of goods sold and operating expenses: what the core business earns before interest and tax.

DefinitionRevenue less cost of goods sold and operating expenses: what the core business earns before interest and tax.

Operating profit, also called operating income or EBIT in many reports, is what the business earns from its normal operations. It takes gross profit and subtracts the costs of running the company, such as salaries, rent, marketing and depreciation, but stops before interest expense, income tax and non-operating items.

How it is computed

Operating profit = revenue − cost of goods sold − operating expenses. Operating margin divides it by revenue.

Example

Revenue of $1,500,000, cost of goods sold of $900,000 and operating expenses of $420,000 give gross profit of $600,000 and operating profit of $180,000, an operating margin of 12%.

Where it goes wrong

Items placed on the wrong side of the line. A gain on selling equipment or a one-time legal settlement booked inside operating expenses flatters or hides the real result, and companies classify these differently, so check the notes before comparing. For how it differs from revenue and net income, see revenue vs profit.

Articles that use this term

Finance metrics and formulas

Revenue vs profit: the difference, shown on one P&L

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Gross margin vs contribution margin vs net margin per customer: what is the difference

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Contribution margin ratio: formula, contribution per unit and the contribution margin income statement

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EBITDA margin: formula, worked example and what counts as good

EBITDA margin is earnings before interest, tax, depreciation and amortization divided by revenue. This page builds EBITDA from a P&L both ways, compares three companies whose ranking flips between operating margin and EBITDA margin, and covers the SEC non-GAAP rules and the lease trap that make EBITDA margins hard to compare.

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EBITDA vs operating income: the difference, with one P&L worked both ways

Operating income is after depreciation and amortization; EBITDA adds them back. This page works one P&L both ways, reconciles the two EBITDA figures line by line, separates EBIT from operating income, and sets out the SEC rules that apply when a US company reports EBITDA.

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