Operating profit
Operating profit shows what your business earns from core trading, before interest and tax.
Published Wednesday 12 August 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, after running costs but before interest and tax.
- The quickest formula is gross profit minus operating expenses, where operating expenses include depreciation and amortisation.
- Because it strips out interest and tax, operating profit shows how well the part of the business you control is actually performing.
- Operating profit is often the same figure as EBIT, and dividing it by revenue gives you your operating profit margin.
What is operating profit?
Operating profit is the money left from your sales after you pay the costs of running the business, but before you pay interest and tax. It is also called operating income, and it shows whether your day-to-day trading makes more money than it costs to keep going.
It sits in the middle of your income statement. You start with revenue, take off the cost of what you sell to reach gross profit, then take off your other running costs to reach operating profit. Only interest and tax stand between operating profit and the net profit you get to keep.
The operating profit formula
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There are two common ways to write the formula, and both give the same answer. The short version starts from gross profit, and the longer version starts from revenue.
- Operating profit = gross profit − operating expenses
- Operating profit = revenue − cost of goods sold − operating expenses
Operating expenses cover the everyday costs of trading, such as rent, salaries, utilities and marketing. They also include two adjustments your accountant makes: depreciation, which spreads the cost of wearing out equipment over time, and amortisation, which does the same for intangible assets. Interest and tax are left out on purpose, which is why operating profit reflects only the parts of performance you can influence.
How to calculate operating profit
You can work out operating profit from your profit and loss report in four steps.
- Add up your revenue for the period.
- Subtract the cost of goods sold to get your gross profit.
- Add up your operating expenses, including depreciation and amortisation.
- Subtract those operating expenses from your gross profit.
Say a small shop makes R900,000 in sales and spends R400,000 on the stock it sells, leaving R500,000 in gross profit. If rent, salaries, utilities, marketing and depreciation come to R350,000, the operating profit is R150,000. If working through the numbers feels slow by hand, our guide on how to measure profitability walks through where each figure comes from.
Why operating profit matters for your business
Operating profit tells you how much of your income survives once the controllable costs of trading are covered. That makes it a clearer signal of core performance than net profit, because a large loan or a one-off tax event can hide how the underlying business is doing.
The gap between operating profit and net profit also matters when margins are tight. The average after-tax profit margin across all South African businesses was just 1.3% in 2024, according to Statistics South Africa's Annual Financial Statistics, as analysed by the Bureau of Market Research. Tracking operating profit on its own shows how much of that pressure comes from running costs you can act on, rather than interest and tax you often can't.
Operating profit margin
Operating profit margin turns the rand figure into a percentage, so you can compare periods or businesses of different sizes. You calculate it by dividing operating profit by revenue and multiplying by 100.
- Operating profit margin = (operating profit ÷ revenue) × 100
Using the shop above, R150,000 divided by R900,000 gives an operating profit margin of about 16.7%. What counts as healthy depends heavily on your industry, though a margin of between 15% and 25% is often considered strong for many businesses, according to Sage. It helps to compare your profit margin against similar businesses rather than a single benchmark.
Operating profit vs gross profit vs net profit
Operating profit is one of three profit figures on your income statement, and each one strips out more cost than the last. Reading them together shows where money is made and where it leaks away.
- Gross profit is revenue minus the cost of goods sold, so it shows the profit on what you sell before overheads.
- Operating profit takes gross profit and removes operating expenses, so it shows the profit from running the business before interest and tax.
- Net profit takes operating profit and removes interest and tax, so it shows the bottom-line profit you actually keep.
If your gross profit margin is healthy but operating profit is thin, the issue is usually overheads rather than pricing.
Operating profit vs EBIT and EBITDA
Operating profit is closely related to two other measures you will see in financial reports: EBIT and EBITDA. They describe similar ground but draw the line in slightly different places.
- EBIT stands for earnings before interest and tax. It usually equals operating profit, but EBIT can also include income from outside core operations, such as investment gains, while operating profit does not.
- EBITDA stands for earnings before interest, tax, depreciation and amortisation. It takes operating profit and adds back depreciation and amortisation, which makes it useful for comparing businesses with different asset bases.
If you want to look at core operations after tax as well, the related measure is net operating profit after tax.
Track your operating profit with Xero
Working out operating profit is much easier when your revenue and costs update themselves. Xero pulls your transactions together and generates a profit and loss report, so you can see gross profit, operating profit and net profit without building a spreadsheet. You can get one month free and see how clear your numbers can be.
FAQs on operating profit
Here are quick answers to some common questions about operating profit.
Is operating profit the same as operating income?
Yes, operating profit and operating income mean the same thing and the terms are used interchangeably. Both describe the profit from core operations before interest and tax.
Is operating profit the same as EBIT?
They are usually the same figure. The difference is that EBIT can include income from outside core operations, whereas operating profit counts only trading activities.
Where do you find operating profit in your accounts?
You will find it on your income statement, also called the profit and loss report, on the line below gross profit and above interest and tax. Accounting software calculates it for you as you record transactions.
Can a business have a negative operating profit?
Yes. When operating expenses are higher than gross profit the result is an operating loss, which signals that core trading is not yet covering its running costs.
What is a good operating profit margin?
There is no single target, because healthy margins differ by sector, size and stage. The most useful approach is to compare your margin against similar businesses and track whether it is rising or falling over time.
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.