Quick Summary
Data-driven managers see up to 86% year-over-year growth in operating profit, with 32% reporting improved budgeting accuracy and double the increase in operating cash flow. At the heart of this success is Operating Profit meaning (OP)—a key metric that measures a company’s earnings from core operations before interest and taxes. It reveals how effectively a business controls costs and drives sustainable growth. With an OP calculator, companies can assess financial health, benchmark against competitors, and refine their strategies for long-term profitability.
Operating profit margin is a key financial metric that shows how much profit a business makes from its core operations after deducting the cost of goods sold (COGS) and operating expenses. It excludes interest, taxes, and other external factors, making it a clear indicator of operational efficiency. This margin also includes depreciation and amortization, helping businesses assess their true financial health and long-term sustainability.
The non-operating income that OP excludes is as follows:
Apart from that, OP also removes non-operating expenses such as:
Before understanding the operating profit calculation revenue formula, you should be aware of two components. They are as follows:
Gross income is the total amount of money that your business makes after sales. This is the total income before reducing the interest payments, taxes, and other business expenses. Make sure to measure gross income accurately. This is because it is the first step of calculating OP as well as taxes.
The gross income formula is as follows:
Gross Income = Gross Revenue – Cost of Goods Sold (COGS)
Here, gross revenue is the total revenue made in sales before any deduction. COGS is the amount spent in the production stage. COGS depends on the working activities of the industry you are working in. Some expenses under COGS are:
Operating expenses are the costs a business incurs to run its day-to-day operations. These include rent, utilities, salaries, marketing, insurance, and administrative expenses. Unlike the cost of goods sold (COGS), which is directly tied to production, operating expenses cover the broader costs of maintaining business functions. Managing these expenses effectively is crucial for improving (OP) and overall financial health. This depends on various factors such as:
However, here are some of the most common operating expenses:
Please note that capital and non-operating expenses are not a part of this category. Capital expenses are high-value investments made by your business. They offer benefits for over a year. Purchasing fixed assets like equipment, machines, and buildings is are example. It can be non-physical assets like trademarks or patents as well.
Non-operating expenses, as you already know, are expenses connected with daily operations. These include costs of relocating buildings, interest payments, etc.
So, how to calculate operational profit or loss? The operational profit or loss formula is as follows:
Operating Income = Gross Income – Operating Expenses
Or
Operating Profit = Gross Revenue – (Operating Expenses + Cost of Goods Sold)
Let’s say you run a pastry shop. Apart from that, you also take delivery orders for customized birthday cakes. Now, you are planning to expand your business. For that, you need a business loan. You will have to produce operating income to the investors and creditors to avail of the loan.
Looking at your finances, you realize that your business has made a total income of Rs. 5,00,000. The expenses you made were as follows:
Expenses | Amount |
---|---|
Insurance | Rs.50,000 |
Power | Rs.15,000 |
Property | Rs.30,000 |
Wages | Rs.40,000 |
Transit | Rs.30,000 |
Supplies | Rs.15,000 |
Repairs | Rs.20,000 |
COGS | Rs.1,00,000 |
Gross Income = Gross Revenue – Cost Of Goods Sold
= Rs.5,00,000 – Rs.1,00,000
= Rs.4,00,000
Operational Expenses = Rs.50,000 + Rs.15,000 + Rs.30,000 + Rs.40,000 + Rs.30,000 + Rs.15,000 + Rs.20,000
Operational Expenses = Rs.2, 00,000
Operating Income = Gross Income – Operational Expenses
= Rs.4,00,000 – Rs.2,00,000
= Rs.2,00,000
You can now present to investors that your business made a profit of Rs. 2,00,000 last year.
High-profit income is a good sign. However, that may not always guarantee profitability. There is another case that you should consider. Your company can still be running at a loss despite making money through sales.
For example, your company generates good revenue by selling products. But, you lose a large portion of profits because of high-interest payments and taxes. It can also be due to the company’s poor financial decisions and unwanted expenses.
Read More: Net Profit: Understanding Its Significance for Your Business
Operating profit is a crucial financial metric that reflects a company’s ability to generate earnings from its core business operations. Unlike net profit, which includes taxes and interest expenses, OP focuses solely on revenue and essential costs, providing a clearer picture of a company’s operational efficiency. A high OP indicates strong financial health, while a low or declining profit may signal inefficiencies or rising costs.
Investors and stakeholders use OP to evaluate a company’s profitability and growth potential. Since it excludes non-operating factors like one-time gains or losses, it helps in making informed business decisions. Companies with consistent operating profits are often seen as stable and well-managed, making them more attractive to investors.
OP is a key financial indicator that measures a company’s ability to generate earnings from its core business activities. It is calculated using the operating profit formula:
OP = Gross Profit(GP)– Operating Expenses(OE)
Understanding how to calculate operating profit ratio formula helps businesses assess their financial health and efficiency. A strong operating profit shows that a company is managing its expenses well and generating sustainable revenue.
Another crucial metric is the operating profit margin, which is calculated as:
Operating Profit Margin = (Operating Profit / Revenue) × 100
This percentage helps businesses compare profitability across different periods or industries. A higher margin indicates strong cost control and efficient operations, while a lower margin suggests potential financial challenges. By monitoring operating profit and optimizing costs, companies can improve profitability and long-term growth.
Operating profit is the money left with the company to meet needs such as:
Thus, it benefits company managers and third-party entities like investors in many ways. Here’s how:
Operating Profit and Gross Profit are both measures of a company’s profitability, but they reflect different stages of the income statement.
Both Operating Profit and EBITDA measure operational performance, but EBITDA is often used to compare profitability across companies by removing some non-cash and financing-related items.
Related Topic: Business to Business: What Is B2B
Operating Profit is the profit a company makes from its core business operations, calculated as revenue minus operating expenses (e.g., cost of goods sold, wages, rent). It excludes non-operating items like interest, taxes, or one-time gains/losses. It shows how efficiently a company runs its primary activities.
Net Profit is the total profit after deducting all expenses, including operating costs, interest, taxes, and non-operating items (e.g., investment income or losses). It reflects the overall financial health and what’s left for shareholders.
Key Difference: Operating profit focuses on core operations, while net profit includes everything, making it a broader measure of profitability. For example, a company could have strong operating profit but low net profit due to high debt interest or taxes.
Operating profit reveals how efficiently your business generates profit from its core operations, independent of financing, taxes, or one-time events. Here’s what it can show:
Example: A retailer with ₹8 crore in revenue and ₹6.4 crore in operating expenses has an ₹1.6 crore operating profit, reflecting a 20% margin. If margins decline over time, it may signal rising costs or reduced sales efficiency—prompting a closer review of supplier contracts, operational costs, or pricing strategies.
By focusing on core operations, operating profit helps you diagnose the health of your business’s engine, separate from external financial factors.
The income statement notes your OP. You can get an idea about this and the expenses incurred by analyzing the statement. This will help in assessing the company’s working efficiency. It gives insights into the financial health of a firm.
OP is a crucial financial metric that reflects a company’s profitability from its core operations, excluding non-operating income and expenses. It provides valuable insights into operational efficiency, cost management, and overall business performance. By accurately calculating operating profit, businesses can assess their financial health, make informed strategic decisions, and identify areas for improvement.
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The operating revenue formula is as follows:
Operating Income = Gross Income – Operating Expenses
(Or) Operating Profit = Gross Revenue – (Operating Expenses + Cost of Goods Sold)
Gross income is the revenue a business generates through sales. The formula to calculate gross income is as follows:
Gross Income = Gross Revenue – Cost of Goods Sold (COGS)
An operating expense is an amount spent for producing and selling goods.
Operating profit represents the profit a company makes from its core business operations, calculated by subtracting operating costs (like cost of goods sold and operating expenses, including depreciation and amortization) from its revenue. It essentially shows how well a company is performing in its primary business activities before considering non-operating items like interest and taxes.
Operating profit is a company’s earnings after deducting operating expenses and Cost of Goods Sold (COGS). It’s also known as EBIT (earnings before interest and taxes).
For instance, your shop has revenue of Rs.10,00,000 in a year. The cost of Goods Sold or COGS IS Rs.4,00,000. Your working expenses amount to Rs.3,00,000. You have to pay Rs.5,00,000 in income taxes. Now, your operating profit will be Rs.3,00,000. The formulas used are:
Operating Income = Gross Income – Operating Expenses
Gross Income = Gross Revenue – COGS
The profit ratio compares the business’s operating income with the revenue generated. The profitability ratio shows how much profit a company makes through its sales.
The formula of operating profit is as follows:
Operating Income = Gross Income – Operating Expenses
The following is the EBIT formula:
EBIT = Net Income + Interest + Taxes
Operating profit is calculated by subtracting operating costs (i.e., cost of goods sold and operating expenses) from revenue. The operating profit formula is: Operating Profit = Gross Profit – Operating Expenses. The operating margin is the ratio between operating profit and revenue, expressed as a percentage.
No, operating profit is not the same as gross profit. Gross profit is calculated by subtracting the cost of goods sold (COGS) from revenue, while operating profit is derived from gross profit by subtracting all operating expenses, such as salaries, rent, and utilities, according to Investopedia.
The operating profit margin formula is: Operating Profit Margin = (Operating Income / Revenue) * 100. It expresses operating profit as a percentage of revenue, indicating how much profit a company makes from its core business operations before accounting for interest and taxes.
Authored by, Amay Mathur | Senior Editor
Amay Mathur is a business news reporter at Chegg.com. He previously worked for PCMag, Business Insider, The Messenger, and ZDNET as a reporter and copyeditor. His areas of coverage encompass tech, business, strategy, finance, and even space. He is a Columbia University graduate.
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Chegg India does not ask for money to offer any opportunity with the company. We request you to be vigilant before sharing your personal and financial information with any third party. Beware of fraudulent activities claiming affiliation with our company and promising monetary rewards or benefits. Chegg India shall not be responsible for any losses resulting from such activities.