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Company profit that remains after subtracting all expenses associated with selling its products or services.[sc:kit02 ]
Explanation of Operating Profit
Also called the Earnings Before Interest and Taxes (EBIT) and listed on the Income Statement, the Operating Profit shows how much profit is left after subtracting Operating Expenses – those expenses associated with selling the goods or services. Examples of operating expenses are Marketing and Sales, General and Administrative, Research and Development, Restructuring Charges, among others.
Importance of Operating Profit
The Operating Profit figure is useful, as it shows how much profit the company is receiving before any income or loss from investing, plus taxes the company will have to pay. This is a way to separate out how much income the company is getting from its core business – selling goods or services. Operating Profit is similar to Gross Profit in that trends over time will point to similar positive or negative aspects of a company. However, Operating Profit is directly affected by ongoing, or day-to-day activities of the company.
You may notice one year the Operating Profit increased from the year before, but drastically decreased the following year. This is where you may have to read the fine print – often called “Accompanying Notes to Consolidated Financial Statements”. This is basically the opportunity for management of the company to explain themselves, as they often do when there are significant differences in financial statement figures.
In those notes you may find out they purchased new machinery which caused their repairs and maintenance figure to go up, or hired more design engineers for product development which caused their research and development figure to go up. This in turn reduced the Operating Profit for that year. You could anticipate that the Operating Profit for the following year might improve, as they now have new, more efficient machinery, an increasingly skilled workforce.