Operating Profit - Definition

Operating Profit: Operating profit is the profit earned by the company after paying off its cost of goods sold, operating expenses, non cash expense such as depreciation and amortisation. The expense does not include interest and taxes. Operating profit may also be defined as the profit earned before interest and taxes.

It should be kept in mind that, operating profit comes from operating revenue, and thus the revenue earned from due course of business should be considered while calculating the same. For a manufacturing company, income earned from investments in market or in any company (partial interest) should not be included in operating revenue.

Formula: Operating Revenue – Cost of goods sold – Operating expenses – Depreciation & Amortisation = Operating profit

Implication: Operating profit gives an idea about the amount of profit earned by a company through its core business operations. From analysis point of view operating profit in itself has no meaning unless compared with previous year/quarter or budgeted figures or with its peers. Any sudden increase in the profits of the company may give an indication that the company performance is improving, but this may not be the case. The company might have earned profit from other source i.e through investments. Thus operating profit if compared gives a clear picture of company’s core business performance.