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What is EBIT or Operating Profit?

EBIT OR OPERATING PROFIT

Generally, Operating profit and “Earnings Before Interest and Taxes” (EBIT) are the same thing.

The operating profit can be specifically determined using the given formula:

Operating Profit = Operating Revenue – Cost of Goods Sold (COGS) – Operating Expenses – Depreciation – Amortisation. *

Also, EBIT (OP) = Revenue – All other Operating expenses.

Particularly, the operating profit is the measure of how well a company is being managed.
It is watched closely by all stakeholders as it measures both overall demand for the company’s products or services(sales). Also, the company’s efficiency in delivering (those) products or services (costs). It specifically cuts out other gains or losses from taxes, investments, etc. This helps to analyze the better working of a company without its capital structure costs and taxes significantly. It also helps investors in comparing the interested companies in the same industry with various tax rates. It adjusts the company’s capital structure income by explicitly adding interest expense. Also, the tax system it is under. EBIT indeed does not consider interest expenses. As a result, if a firm is in a large amount of debt, it might exaggerate the company’s earnings potential.

For example:
From the below income statement, you can see that operating profit is the same concept as Earnings Before Interest and Taxes – it simply depends on which label a company uses for this identical concept.

Revenue (R) 100
Cost of Goods (CG) 50
Gross profit (G) 50 R-CG
Operating. Expenses (OE) 30
EBIT (Op. Profit) 20 G-E
Interest 3
Taxes 5
Net profit 12

 

CONCLUSION

In conclusion, operating profit is the measure of a company’s working efficiency. As can be seen, this doesn’t take any indirect expenses like taxes or debts into consideration. It accordingly identifies what the business develops from its core functions. Significantly, it is easy to calculate. Also, makes easy comparison between companies.

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