There are various methods used in determining the operating profit of a company. One of the methods is in analyzing the profit margins of a company. Another method is examining the profit trends from one year to another or over a number of quarters. Operating profit and EBIT are interchangeably used to describe similar financial indicators of the operating income of a company. These two are accounting terms used for determining the progress of a firm or company.

Operating Profit

Operating is a term used to refer to the items, expenses and revenues involved with the production of goods and services in selling and delivering to customers and any other fixed or overhead costs involved. Measures of EBIT and Operating profit factor in depreciation and amortization since these two are deemed as operating expenses.

The revenue amount which remains after the company pays off all its expenses apart from income taxes is referred to as operating profit. Many companies do not include non -recurring and extra ordinary items since these expenses do not represent usual operating events. An example of an extra- ordinary item is the sale of a division while an example of a nonrecurring item is the total loss of inventory which can be caused by fire or flood. Included in operating profit is revenue generated after sale of company goods and services, COGS or cost of delivered services, selling costs and administrative expenses.

Therefore, operating profit refers to the returns which remain with the firm or company after all operating expenses are subtracted from gross profit. When this calculation method is used, the amount used for all the ongoing functions such as payments of tax or investments can be determined.

Operating profit method is a valuable tool that can be used by businessmen. The tool is useful in helping businessmen to put into use all the resources available. In case the operating profit shows a decline, then it is possible that the company is experiencing some changes either in the company or market operations. If there are changes in the operating profit, this is an indication that changes have to be made in the company for one to realize profit.

EBIT

This is the abbreviation for Earnings before Interest and Taxes which captures the earning power of your business and the ability of repaying debts from ongoing regular operations. EBIT measures a company’s profitability. If the result is large, then the firm or company is deemed to be very profitable. When operating expenses are deducted from operating revenue and added to Non -operating income, then it results to EBIT.

EBIT does not include such revenue generated from sale of assets and also the costs involved in this which do not form part of the usual operations. EBIT is used by lenders and investors due to the close association with the frequent use of EBITDA which is used in measuring cash flow.

Operating profit and EBIT are also called operating income. Neither EBIT nor operating profit includes income taxes and interest payments.

Company owners and investors make use of Operating profit and EBIT to enhance investments and their profits. As the financing structures and taxation of a company differs from the other, EBIT will be beneficial in determining the company’s exact profitability. Investors make use of the EBIT technique in establishing the company or firm which is most profitable relative to the operation efficiency.

The EBIT method will also be useful to an investor in establishing if the company will result to profits after all the expenses have been paid. It is an ideal tool which can be used by investors in choosing whether or not to invest in a certain company.