Operating profit
Operating profit is what your business earns before interest and taxes. Learn the formula and how to calculate it.
Published Monday 17 August 2026
Table of contents
How to calculate operating profit
Key takeaways
- Operating profit is the profit your business earns from its core operations after deducting operating expenses and depreciation from gross profit, but before interest and taxes.
- The formula is: operating profit = gross profit − operating expenses − depreciation, or operating profit = revenue − cost of goods sold − operating expenses.
- Operating profit is also called operating income or EBIT (earnings before interest and taxes) because it excludes financing costs and tax obligations.
- Operating profit margin measures how efficiently your business converts revenue into operating profit and varies by industry.
What is operating profit?
Operating profit is the amount your business earns from its core activities after subtracting operating expenses and depreciation from gross profit, but before accounting for interest and taxes. It shows how much money your day-to-day operations generate.
Operating profit is also known as operating income or EBIT (earnings before interest and taxes). This metric focuses purely on your business's operational efficiency, setting aside financing decisions and tax obligations. It gives you a clear view of whether your core business activities are profitable.
Operating profit formula
You can calculate operating profit using two formulas, depending on your starting point.
If you start with gross profit:
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Operating profit = gross profit − operating expenses − depreciation
If you start with revenue:
Operating profit = revenue − cost of goods sold − operating expenses
Cost of goods sold (COGS) includes the direct costs of producing your goods or services, such as raw materials and direct labour. Operating expenses are the indirect costs of running your business, including rent, utilities, salaries, marketing, and depreciation. Understanding the difference between these costs helps you identify where to increase profits by reducing expenses or improving efficiency. You can also learn more about gross profit margin to see how your direct costs affect profitability.
How to calculate operating profit
Follow these steps to work out your operating profit from your sales figures.
- Start with your total revenue (the amount you earned from sales).
- Subtract your cost of goods sold to get your gross profit.
- Subtract your operating expenses (rent, utilities, wages, depreciation) from gross profit.
- The result is your operating profit.
Here's a worked example. Your business sold $20,000 worth of goods or services. It cost $8,000 to provide those goods or services (your cost of goods sold). Your gross profit is $20,000 − $8,000 = $12,000. Your operating expenses (rent, electricity, phone) totalled $3,000. Your operating profit is $12,000 − $3,000 = $9,000. This figure tells you how much your core operations earned before interest and taxes. You can review your financial statements to find these numbers.
Operating profit vs gross profit vs net profit
These three profit measures build on each other, each subtracting additional costs to give you a fuller picture of your business's financial health.
- Gross profit is your revenue minus your cost of goods sold. It shows how much you earn after covering direct production costs.
- Operating profit is your gross profit minus operating expenses (rent, utilities, salaries, depreciation). It shows what your core business earns before financing and taxes.
- Net profit is what remains after subtracting all expenses, including interest on loans and taxes. It's your bottom line.
Interest and taxes fall below operating profit in this cascade. Operating profit helps you assess your business's operational efficiency, while net profit shows your total profitability after all obligations. You can explore how to measure profitability for more detail on using these metrics.
What operating profit excludes
Operating profit focuses on your core business performance by leaving out certain income and expenses.
- Interest expenses on loans or debt
- Interest income from investments
- Income taxes
- One-off gains or losses (such as selling an asset)
- Investment income
Because operating profit excludes interest and taxes, it equals EBIT (earnings before interest and taxes). This makes operating profit useful for comparing businesses with different financing structures or tax situations. The focus stays on how well the business runs, not how it's funded.
What is operating profit margin?
Operating profit margin measures what percentage of your revenue becomes operating profit. It tells you how efficiently your business turns sales into profit from operations.
The formula is:
Operating profit margin = (operating profit ÷ revenue) × 100
For example, if your operating profit is $9,000 and your revenue is $20,000, your operating profit margin is ($9,000 ÷ $20,000) × 100 = 45%. A higher margin means you keep more of each dollar earned. What counts as a healthy margin depends on your industry, as some sectors naturally have higher operating costs than others. You can compare your margin against similar businesses to gauge performance, and review profitability ratios for additional ways to assess your financial health.
Why operating profit matters
Operating profit reveals how efficiently your core business generates money, separate from financing and tax decisions.
- It shows the profitability of your day-to-day operations without the influence of debt structure or tax strategies.
- Investors and lenders use it to compare businesses across different industries and capital structures.
- Tracking it over time helps you spot trends in operational efficiency.
- It highlights whether your pricing, cost controls, and production processes are working.
One limitation is that operating profit ignores financing costs and taxes. A business with high operating profit but heavy debt may still struggle with cash flow. Use operating profit alongside net profit for a complete picture of financial health.
Track your operating profit with Xero
Monitoring your operating profit helps you understand whether your core business is performing well and where you can improve. With accounting software, you can pull together revenue, cost of goods sold, and operating expenses in one place to calculate operating profit quickly. Xero gives you real-time reports and insights to stay on top of your numbers, so you can get one month free and start tracking your profitability today.
FAQs on operating profit
Here are answers to common questions about operating profit.
How do you calculate operating profit?
Subtract your cost of goods sold from revenue to get gross profit, then subtract operating expenses (including depreciation) from gross profit. The result is your operating profit.
What is the difference between operating profit and net profit?
Operating profit is earnings before interest and taxes, while net profit is what remains after deducting all expenses, including interest and taxes. Net profit is your final bottom line.
Is operating profit the same as EBIT?
Yes, operating profit and EBIT (earnings before interest and taxes) are the same figure. Both exclude interest expenses and income taxes from the calculation.
What does operating profit exclude?
Operating profit excludes interest expenses, interest income, taxes, investment income, and one-off gains or losses. It focuses solely on earnings from core business operations.
What is a good operating profit margin?
A good operating profit margin varies by industry. Compare your margin to similar businesses in your sector to understand whether your operational efficiency is competitive.
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.