Profit is the revenue earned for a business activity or transaction after subtracting any related expenses. When analysts look for potential investments, profitability will be a crucial indicator of business health. The most common types of profit are gross profit, operating profit, and net profit.
Gross profit considers only sales and the cost of goods sold (COGS.) Operating profit takes gross profit and subtracts the operational costs. Finally, net profit will deduct the taxes and interest from the operating profit to give a complete picture of a company’s overall profit.
How to calculate profit
You can calculate profit by deducting total revenue from total expenses. However, there are different calculations depending on whether you are looking at gross profit, operating profit, or net profit.
Gross profit = TOTAL SALES – COGS
Operating Profit = GROSS PROFIT – OPERATING EXPENSES
Net profit = OPERATING PROFIT – TAXES & INTEREST
Profit margin, another profitability ratio, is the percentage of sales that have turned a profit and is the most commonly used in reference to net profit.