Operating profit
Learn what operating profit is, how to calculate it, and how it differs from gross and net profit.
Published Thursday 6 August 2026
Table of contents
Operating profit is the money you make before taxes
Key takeaways
- Operating profit is the money left from core business activities after subtracting operating costs, but before interest and tax.
- The formula is: operating profit = revenue − cost of goods sold − operating expenses − depreciation and amortisation.
- Because it excludes interest and tax, operating profit is also called earnings before interest and tax (EBIT).
- Operating profit differs from net profit, which subtracts interest and tax to show the final amount a business keeps.
What is operating profit?
Operating profit is the money a business has left from its core operations after subtracting operating costs, but before paying interest and tax. It shows how much profit a company generates from day-to-day activities such as selling products or providing services.
To arrive at operating profit, you start with revenue and subtract cost of goods sold to get gross profit. You then subtract operating expenses like rent, wages, and marketing, along with depreciation and amortisation.
In Hong Kong, the tax a business pays on profit is profits tax, paid to the Inland Revenue Department. Operating profit is calculated before this tax is deducted, giving you a clear view of how well your operations perform independent of financing decisions and tax obligations.
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Why operating profit matters
Understanding your operating profit helps you make informed decisions about pricing, staffing, and where to cut costs. It isolates the performance of your core business from factors like loan interest or one-off gains.
Operating profit is a useful measure of operational efficiency. A rising operating profit over time suggests your business is controlling costs effectively or growing revenue without proportionally increasing expenses. You can use it to measure profitability and compare your performance against industry benchmarks or past periods.
Investors and lenders often look at operating profit to assess how sustainable a business is. Because it strips out interest and tax, it offers a consistent basis for comparing companies with different financing structures or in different tax jurisdictions.
What's included in and excluded from operating profit
Operating profit focuses on the income and expenses directly tied to running your business. The items included and excluded determine what the figure reveals about your operations.
Included:
- Revenue from sales of goods or services
- Cost of goods sold (materials, direct labour)
- Operating expenses such as rent, wages, utilities, and marketing
- Depreciation and amortisation of assets
Excluded:
- Interest paid on loans or earned on investments
- Profits tax and other income taxes
- One-off gains or losses (such as selling property)
- Investment income
Because interest and tax are excluded, operating profit is also called earnings before interest and tax (EBIT). The two terms are often used interchangeably, though some accounting frameworks treat certain non-operating items differently.
Operating profit formula
The formula gives you a straightforward way to calculate operating profit from figures in your income statement.
Operating profit = revenue − cost of goods sold − operating expenses − depreciation and amortisation
You can also express this using gross profit:
Operating profit = gross profit − operating expenses
Either approach reaches the same result. The second version is useful if your accounting software or financial reports already show gross profit as a line item.
How to calculate operating profit
Follow these steps to work out operating profit from your financial records.
- Identify your total revenue for the period.
- Subtract cost of goods sold from revenue to get gross profit.
- Total your operating expenses, including depreciation and amortisation.
- Subtract operating expenses from gross profit to arrive at operating profit.
Here is a worked example using Hong Kong dollars:
- Revenue: HK$1,000,000
- Cost of goods sold: HK$600,000
- Gross profit: HK$400,000
- Operating expenses (including depreciation): HK$280,000
- Operating profit: HK$120,000
What is a good operating profit margin?
Operating profit margin shows what percentage of revenue remains as operating profit after covering operating costs. It helps you assess how efficiently your business converts sales into profit.
Operating profit margin = (operating profit / revenue) × 100
A higher margin means more of each dollar in revenue flows through to operating profit, suggesting efficient cost management. A lower margin may indicate rising expenses or pricing pressure.
What counts as a healthy margin varies by industry. Retail businesses often operate on thinner margins than professional services firms. As a general benchmark, a range of roughly 15% to 25% is often considered healthy for many industries, according to Sage. Compare your margin against similar businesses in your sector to see where you stand.
Operating profit vs gross profit and net profit
Gross profit, operating profit, and net profit each measure profitability at a different stage. Understanding the distinctions helps you pinpoint where your business is performing well or losing money.
- Gross profit = revenue − cost of goods sold. It shows the profit left after covering direct production costs.
- Operating profit = gross profit − operating expenses (including depreciation and amortisation). It reflects profit from core operations before interest and tax.
- Net profit = operating profit − interest − tax. It is the final profit a business keeps after all expenses.
Each metric serves a different purpose. Gross profit highlights production efficiency, operating profit reveals operational performance, and net profit shows overall profitability after financing and tax obligations.
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FAQs on operating profit
Here are answers to common questions about operating profit and how it fits into your business finances.
How do you calculate operating profit?
Subtract cost of goods sold and operating expenses (including depreciation and amortisation) from revenue. The result is your operating profit before interest and tax.
Is operating profit the same as EBIT?
In most cases, yes. Both terms refer to profit from operations before interest and tax. Some accounting standards may treat certain non-operating items differently, but for small businesses the figures are typically identical.
What is a good operating profit margin?
It depends on your industry. A margin of 15% to 25% is often considered healthy, but capital-intensive sectors may have lower margins while service businesses may achieve higher ones.
What is the difference between operating profit and net profit?
Operating profit excludes interest and tax, showing profit from core operations. Net profit subtracts interest and tax from operating profit to reveal the final amount a business retains.
Is operating profit the same as operating income?
Yes. Operating profit and operating income are interchangeable terms. Both describe the profit earned from regular business activities before deducting interest and tax.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.