Operating profit is the profitability of the business, before taking into account interest and taxes. To determine operating profit, operating expenses are subtracted from gross profit. Operating profit is a key number for managers to watch as it reflects the revenue and expenses that they can control.
Operating profit and EBIT (earnings before interest and taxes) are the same thing.
In this sample income statement, you can see that operating profit is the same concept as Earnings Before Interest and Taxes – it just depends on which label a company uses for this identical concept. Amounts shown in thousands.
(Excerpts from Financial Intelligence, Chapter 9 – The Many Forms of Profit)
Operating profit – gross profit minus operating expenses or SG&A, including depreciation and amortization – is also known by the peculiar acronym EBIT (pronounced EE-bit). EBIT stands for earnings before interest and taxes. (Remember, earnings is just another name for profit.) What has not yet been subtracted from revenue is interest and taxes. Why not? Because operating profit is the profit a business earns from the business it is in – from operations. Taxes don’t really have anything to do with how well you are running your company. And interest expenses depend on whether the company is financed with debt or equity. But the financial structure of the company doesn’t say anything about how well it is run from an operational perspective.
So operating profit, or EBIT, is a good gauge of how well a company is being managed. It is watched closely by all stakeholders, because it measures both overall demand for the company’s products or services (sales) and the company’s efficiency in delivering those products or services (costs).