Operating Profits Defined

What are operating profits? Operating Profits and operating margins are those profits that are the result of what is remaining from gross revenues after Cost of Goods are subtracted (Leaving Gross Profits), and total operating costs deducted from that.  This is total operating profits.

By understanding total operating profits this shows the next level of margins and profits beyond gross profits and gross margins.

Within the three levels of costs and profit margins, gross profits, operating profits, and continuing profits or, net earnings, understanding the different profit levels and breaking these down will allow an investor to determine how well a firm performs versus other firms.

Understanding Operating Costs functions

Operating costs can be looked at to determine how efficient a company is from a management, or back-office perspective, versus total revenues.  If a company is cost conscience, their back-office will likely have a low ratio to revenue.

To determine this, an analyst would use total operating costs and divide these over top of gross revenues.  The product of this is a ratio, or a percentage.  This is also a cost ratio.

Ostensibly, the lower the ratio, the better the costs metric for total operating costs is relative to gross revenues.  A firm that has a low cost ratio would be thought to be more efficient and creating revenue versus the costs of generating revenue.

Operating Margins Explained

Unlike operating efficiencies, operating margins show what amount of profits remain after deducting cost of goods sold as well as total operating costs.  It is important to note that operating margins include total operating costs.  This deducts depreciation and amortization (D&A) out from gross revenues.

By including D&A, this sidesteps what EBITDA shows.  This is the main difference.


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