Operating profit
See what operating profit means, how to calculate it, and how it differs from gross and net profit.
Published Thursday 23 July 2026
Table of contents
Operating profit is the money you make before taxes
Key takeaways
- Operating profit is what your business earns from its core trading, before interest and tax.
- You work it out by taking your gross profit and subtracting your operating expenses, including depreciation and amortisation.
- Operating profit is also called EBIT (earnings before interest and tax), though the two can differ when you have non-operating income.
- Operating profit margin shows operating profit as a percentage of revenue, so you can track efficiency and compare periods.
Operating profit is one of the clearest signs of how well your day-to-day business is performing. Here's what it means and how to calculate it.
What is operating profit?
Operating profit is the money your business keeps from its core operations after covering the cost of goods sold and your operating expenses. It measures how profitable your trading activity is on its own.
It leaves out interest and tax, so it reflects performance before financing and government take their share. That's why operating profit is also known as EBIT (earnings before interest and tax).
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Operating profit formula
The formula builds on your gross profit, which is your revenue minus the cost of goods sold. From there, you get to operating profit in one more step.
Operating profit = gross profit − operating expenses. Your operating expenses are the running costs of the business, such as rent, wages, marketing, and both depreciation and amortisation. Interest and tax aren't part of this calculation.
Operating profit example
A worked example makes the formula easier to picture. Say you run a small retail business over a year.
Your revenue is $500,000 and your cost of goods sold is $300,000, which gives you a gross profit of $200,000. Your operating expenses (rent, wages, marketing, depreciation, and amortisation) come to $120,000.
Subtract the $120,000 in operating expenses from the $200,000 gross profit and your operating profit is $80,000. That $80,000 is what your core business earned before interest and tax.
Operating profit margin
Operating profit on its own is a dollar figure, but the margin turns it into a percentage you can compare. It's a quick read on how efficiently your business turns revenue into profit.
Operating profit margin = (operating profit / revenue) × 100. Using the example above, that's ($80,000 / $500,000) × 100, or a 16% operating margin. Tracking this margin over time shows whether your costs are creeping up or your efficiency is improving.
Operating profit vs gross profit vs net profit
Gross, operating, and net profit are three tiers of the income statement, each removing more costs than the last. Reading them together shows where your money goes.
- Gross profit is your revenue minus the cost of goods sold, so it shows the profit on what you sell before running costs
- Operating profit takes gross profit and subtracts operating expenses, showing what your core operations earn before interest and tax
- Net profit is what's left after all expenses, including interest and tax, so it's your true bottom line
To see the full picture, it helps to read your net profit alongside the other two tiers.
Why operating profit matters
Operating profit strips away financing and tax, so it tells you how healthy your actual business is. That makes it a useful number to watch as you grow.
- Shows the efficiency of your core operations, separate from how you fund the business
- Lets you compare performance across periods, or against similar businesses, on a like-for-like basis
- Helps lenders and investors judge whether your trading can support debt or new funding
- Highlights whether rising costs are eating into the profit your sales generate
For more ways to read these numbers, see the how to measure profitability guide.
Track your operating profit with Xero
When your income and expenses are all in one place, your operating profit updates as you go, so you always know how your core business is tracking. You can see the numbers change in real time and act on them sooner. Try Xero and get one month free.
FAQs on operating profit
Here are answers to some frequently asked questions about operating profit.
How do you calculate operating profit?
Take your gross profit and subtract your operating expenses, including depreciation and amortisation. You don't subtract interest or tax at this stage.
Is operating profit the same as EBIT?
They're usually treated as the same, since both sit before interest and tax. The two can differ when a business has non-operating income, which EBIT includes but operating profit doesn't.
What is a good operating profit margin?
A healthy margin varies widely by industry, so it's most useful to compare against your own past periods and similar businesses. A margin that holds steady or rises over time is a good sign your operations are efficient.
What's the difference between operating profit and net profit?
Operating profit is what your core operations earn before interest and tax. Net profit is what remains after those and every other cost, so it's your final bottom line.
Related terms
Learn more about operating profit
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.