Operating profit (calculation)

Operating profit, often called operating income, is a key metric businesses use to evaluate profitability. It reflects the company's earnings from primary business activities, excluding deductions such as taxes and interest expenses. Simply put, operating profit is the revenue left after subtracting operating expenses and costs directly tied to producing goods or delivering services.

The calculation for operating profit is straightforward:

Operating Profit = Gross Revenue – Cost of Goods Sold (COGS) – Operating Expenses

Here's how these terms break down clearly:

• Gross Revenue: Total income from sales before any deductions.
• Cost of Goods Sold (COGS): Direct costs involved in production, such as materials and direct labor.
• Operating Expenses: Indirect costs necessary for operations, including rent, utilities, administrative salaries, and depreciation.

For example, if a company has a gross revenue of $500,000, COGS of $200,000, and operating expenses totaling $100,000, its operating profit calculation would be:

$500,000 – $200,000 – $100,000 = $200,000

Operating profit provides critical insights into operational efficiency and profitability, allowing businesses and investors to evaluate the financial health of a company's core functions separately from external financing activities or extraordinary items.