Reviewed by Aug 27, 2020| Updated on
What is Operating Profit?
The term "operating income" refers to an accounting statistic that calculates the profits earned by a corporation from its core business operations, where interest and tax deductions are removed from the measurement. Likewise, this operating value excludes all income from the ancillary activities of the corporation, such as earnings from individual companies in which a company might be partially invested.
The operating income can be determined by using the formula following:
Operating Profit = Operating Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Depreciation – Amortisation.
Analysing Operating Profit
Operating income acts as a highly reliable measure of the possible profitability of the company, as it excludes from the equation all extraneous variables. The expenses required to keep the corporation going are included, which is why the operating income takes into account the depreciation and amortisation associated with the properties, which are accounting instruments arising from the activities of a corporation. Many of these variations in the operating profit of a company, operating profit are also distinct from net profits, which may vary from year to year.
Taxable profit is sometimes referred to as operating profits, as well as earnings before interest and tax (EBIT) — but the latter can also contain non-operating income, which is not part of operating profit. When a corporation loses non-operating sales, its operating pay would be equal to EBIT. Given the Gross Income Formulas (Revenue-COGS), the method used to measure operating profit is also summarised as Gross Profit-Operating Expenses-Depreciation-Amortisation.
Exclusions from the Operating Profit Calculation
Revenue earned by the selling of assets is not included in the operating profit statistic outside of any products produced for the express purpose of being sold as part of the core company. Furthermore, interest received by processes such as checking or cash market accounts is not included.