Operating Profit

What Is Operating Profit?

A company's operating profit is its total earnings from its core business functions for a given period, excluding the deduction of interest and taxes. It also excludes any profits earned from ancillary investments, such as earnings from other businesses that a company has a part interest in. An operating loss occurs when core business income ends up being lower than expenses.

Formula and Calculation of Operating Profit

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

Given the formula for gross profit (Revenue - COGS), the formula used to calculate operating profit is often simplified as:

Gross Profit - Operating Expenses - Depreciation - Amortization

What Operating Profit Can Tell You

Operating profit serves as a highly accurate indicator of a business’s health because it removes all extraneous factors from the calculation. All expenses that are necessary to keep the business running are included, which is why operating profit takes into account asset-related depreciation and amortization — accounting tools that result from a firm's operations.

Operating profit is also referred to as operating income as well as earnings before interest and tax (EBIT) — although wrongfully, as the latter includes non-operating income, which is not a part of operating profit. If a firm does not have any non-operating income, its operating profit will equal EBIT.

Companies can choose to present their operating profit figures in place of their net profit figures, as the net profit of a company contains the effects of interest payments and taxes. If a company has a particularly high debt load, the operating profit may present the company’s financial situation more positively than the net profit reflects.

While positive operating profit may express the overall health of a business, it does not in fact guarantee future profitability. Case in point: A company with a high debt load may show a positive operating profit while simultaneously experiencing net losses. In addition, large but extraneous costs are not represented, which may also show a company with a negative net profit having a positive operating profit.

Exclusions from Operating Income

Revenue created through the sale of assets is not included in the operating profit figure, except for any items created for the explicit purpose of being sold as part of the core business. In addition, interest earned from cash such as checking or money market accounts is not included.

While the removal of production costs from overall operating revenue — along with any costs associated with depreciation and amortization — is permitted when determining the operating profit, the calculation does not account for any debt obligations that must be met. This is the case even if those obligations are directly tied to the company’s ability to maintain normal business operations.

Operating income does not include investment income generated through a partial stake in another company, even if the investment income is tied directly to the core business operations of the second company. The sale of assets such as real estate and production equipment is also not included, as these sales are not a part of the core operations of the business.

Example of Operating Profit

Walmart Inc. reported an operating income of $22.5 billion for its fiscal year 2020. Total revenues, or net sales, tallied $559.1 billion.  These revenues came from sales across Walmart's global umbrella of physical stores, including Sam's Club, and its e-commerce businesses.

Meanwhile, the cost of sales (or COGS) and operating, selling, general, and administrative expenses, totaled $420.3 billion and $116.2 billion, respectively.

Operating Revenue [$559.1 billion] - COGS [$420.3 billion ] - Operating Expenses [$116.2] = Operating Profit [$22.5 billion]

What can operating profit tell an investor?

Operating profit serves as a highly accurate indicator of a business’s health because it removes all extraneous factors from the calculation. All expenses that are necessary to keep the business running are included, which is why operating profit takes into account asset-related depreciation and amortization — accounting tools that result from a firm's operations. Operating profit is also referred to as operating income and (wrongfully) earnings before interest and tax (EBIT).

Why might a company report operating profit over net profit?

Companies can choose to present their operating profit figures instead of their net profit figures, as the net profit of a company contains the effects of interest payments and taxes. If a company has a particularly high debt load, the operating profit may present the company’s financial situation more positively than the net profit reflects. While positive operating profit may express the overall health of a business, it does not in fact guarantee future profitability. 

What is excluded from the operating profit figure?

Revenue created through the sale of assets is not included in the operating profit figure, except for any items created for the explicit purpose of being sold as part of the core business. In addition, interest earned from cash such as checking or money market accounts is not included nor does it account for any debt obligations that must be met. Finally, it does not include investment income generated through a partial stake in another company.