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Operating Profit (EBIT)

Operating profit, also known as earnings before interest and taxes (EBIT), is a financial metric that measures the profit a company earns from its core operations. It represents the difference between a company’s revenue and its operating expenses, excluding interest and taxes. Operating profit is an important metric for investors, as it provides insight into a company’s ability to generate earnings from its primary business activities.

How to calculate Operating Profit?

Operating profit is calculated by subtracting a company’s operating expenses from its revenue. The formula for calculating operating profit is as follows:

Operating Profit = Revenue – Operating Expenses

Operating expenses include all costs related to a company’s primary business activities, such as salaries and wages, rent, utilities, and depreciation. Therefore, operating costs do not include expenses such as interest expenses, depreciation, amortization or taxes.

Operating Profit vs. EBITDA

Operating profit and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are both financial metrics that provide insight into a company’s financial performance, but they differ in what they include and exclude.

Operating profit measures the profit a company earns from its primary business activities, excluding interest and taxes, therefore it does include non-cash operating expenses such as amortization and depreciation costs.

EBITDA, on the other hand, is a more comprehensive metric that measures a company’s earnings before accounting for non-cash expenses like depreciation and amortization, as well as interest and taxes.

In other words:

Operating Profit (EBIT) = EBITDA – Non-cash Operating Expenses

Here’s an example of how we would get to Operating Profit and EBITDA from Revenue:

Revenue$500,000
COGS$(150,000)
Gross Profit$350,000
Operating Expenses$(250,000)
EBITDA$100,000
Depreciation and Amortization$(40,000)
Operating Profit (EBIT)$60,000

Operating Profit vs. Net Profit

Unlike Operating Profit, Net profit is the profit after all expenses, including taxes, interest and any other expenses.

Therefore, it’s easy to get to Net Profit from Operating Profit and vice versa by adding (or deducting) all non-operating costs that aren’t included in Operating Profit. These non-operating costs include, for example, corporate taxes, debt interest expenses, exceptional costs (litigation and such), etc.

Here’s an example of how we would get to Net Profit from Operating Profit:

Revenue$500,000
COGS$(150,000)
Gross Profit$350,000
Operating Expenses$(250,000)
EBITDA$100,000
Depreciation and Amortization$(40,000)
Operating Profit (EBIT)$60,000
Non-operating costs$(5,000)
Interest$(10,000)
Taxes$(15,000)
Net Profit$30,000
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