What Is The Difference Between Operating Profit And Operating Margin?

Profit or operating profit is an important measure used by analysts to understand the profitability of a given concern. It is calculated as the difference between revenues from the company's operations less all operating expenses such as the cost of goods sold, employee related expenses and other expenses that are directly associated with company's operations.

And often when corporates release their quarterly earnings or annual profit and loss statement, they in a usual case do not reveal their operating profits separately. Hence there is available a method to calculate operating profit

Accepted formula for calculation of operating profit:

Profit before tax (PBT) + {Finance cost + Depreciation and Amortisation cost} - Other Income (if forms the part of the top-line)

Herein, other income is any of the income or gains accruing to the company, say from some of the investments made by the company. The deduction in its regard is to done as this income is not realized from the company's core business.

Operating profit is also represented in some of the cases by the measure EBIT or earnings before interest and tax. Also, another measure widely used to reflect a company's operating profit is EBITDA or earnings before interest, depreciation, tax and amortization.

A higher operating profit of the company is indicative of healthy operational performance and suggests that the concern will be in a position to service all of the dues to its creditors.

Points to note when analyzing operating profit

Analysts should closely monitor changes in operating profit as there can a case when even despite a fall in sales volume for a given quarter in comparison to the year-ago period, the operating profit of the concern remains intact, which can be due to better realizations or changes in say operational costs.

Also, the metric should not be read alone as it can be misleading for investors as it masks some of the crucial elements, and hence tends to overstate operating cash flows.

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