Operating Profit

Operating profit is a measure of a company’s profitability from its core operations. It is calculated by taking net income and adding back interest expense and depreciation.

Formula for operating profit:

Operating profit = Net income + Interest expense + Depreciation

Components of operating profit:

• Net income: The company’s total income minus total expenses from its operations.
• Interest expense: Interest paid on loans to the company.
• Depreciation: The reduction in the value of assets over time.

Uses of operating profit:

• To measure the company’s ability to generate profit from its core operations.
• To assess the company’s financial strength and ability to generate cash flow.
• To compare companies with similar industry or size.
• To calculate the company’s return on investment (ROI).

Example:

“`Company A has net income of $100,000, interest expense of $20,000, and depreciation of $10,000.

Operating profit = $100,000 + $20,000 + $10,000 = $130,000“`

Therefore, Company A’s operating profit is $130,000.