Operating Profit: How to Calculate, What It Tells You, and Example

What Is Operating Profit?

A company's operating profit is its total earnings from its core business functions for a given period. Put simply, operating profit is a company's net income from its core operations after accounting for operating expenses. Operating profit excludes the deduction of interest and taxes, as well as any profits earned from ancillary investments, such as earnings from other businesses in which a company has a part interest. An operating loss occurs when core business income ends up being lower than expenses.

Formula and Calculation of Operating Profit

The formula used to calculate operating profit is:

Operating Profit = Gross Profit - Operating Expenses - Depreciation - Amortization

Where:

Gross Profit = Revenue - Cost of Goods Sold (COGS)

Understanding Operating Profit

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.

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 taxes and interest payments. 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 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.

Special Considerations

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 liabilities 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.

Operating Profit vs. Other Profit Measures

Operating profit is one metric that is used to determine a company's profitability from its core operations. Other metrics may seem the same, but shouldn't be confused. We've highlighted some of the most common ones below.

Operating Profit vs. Gross Profit

Don't confuse operating profit with gross profit, as the two are very different concepts. Gross profit is the total revenue of a company minus the expenses directly related to the production of goods for sale, such as the cost of goods sold. Companies report their gross profit on their income statement. You can calculate gross profit as follows:

Gross Profit = Revenues - COGS

Derived from gross profit, operating profit reflects the residual income that remains after accounting for all the costs of doing business.

Operating Profit = Gross Profit - Operating Expenses - Depreciation - Amortization

Operating Profit vs. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

Remember that operating profit is an accounting metric for the stakeholders who care about the operational profitability of the company. Earnings before interest, taxes, depreciation, and amortization (EBITDA), on the other hand, is a cash-focused metric for stakeholders who care about the cash flow of the business.

EBITDA takes operating profit and adds back interest, depreciation, and amortization. Here's how it's calculated:

EBITDA = Operating income + Depreciation + Amortization

Operating Profit vs. Net Profit

Net profit is the profit remaining after all costs incurred in the period have been subtracted from revenue generated from sales. Expenses that factor into the calculation of net income but not operating profit include payments on debts, interest on loans, and one-time payments for unusual events such as lawsuits.

Additional income not counted as revenue is also considered in the calculation of net income and includes interest earned on investments and funds from the sale of assets not associated with primary operations.

Example of Operating Profit

Walmart (WMT) reported operating income of $27.01 billion for its fiscal year 2024. Total revenues (net sales as well as membership and other income) were $648.12 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 $490.14 billion and $130.97 billion, respectively.

The Bottom Line

Operating profit looks at a company's earnings generated through normal business operations. Analyzing operating profit, which can be found on the income statement, is useful because it excludes accounting items such as one-time charges, interest, and taxes that may skew a company's profit in a given year. These items are accounted for instead in a company's net profit, or bottom line.