Short answer: Operating profit is the money a company keeps from its core business after paying day-to-day operating costs and depreciation and amortisation for a period. It equals operating revenue minus operating expenses. Income and costs from non-core activities, such as investments, loans, interest and taxes, are left out.
Last reviewed: 9 November 2026
At a glance
The table below lists the terms used in the calculation and what each one covers.
| Term | What it means in the calculation |
|---|---|
| Operating revenue | Money earned from the core business |
| Cost of goods sold | Costs tied directly to production and sales, such as labour, raw materials, inventory purchases and freight |
| Administrative overhead | Costs of running the business that sit within operating expenses |
| Depreciation and amortisation | Charges for the use of long-term assets, counted within operating expenses |
| Gross profit | Operating revenue minus cost of goods sold |
| Operating profit | What remains after all operating expenses are paid |
What is left out of operating profit?
Operating profit is meant to show how the core business performs on its own. Income and costs from non-core activities are therefore excluded. These include income from investments, income and costs linked to loans, interest, and taxes.
This exclusion has a consequence. A company can report a healthy operating profit and still have a large interest bill, because interest is not counted in the figure. Anyone reading operating profit should check the other lines of the company’s accounts to see what sits below it.
How is operating profit calculated?
The basic formula is:
Operating profit = Operating revenue minus Operating expenses
Operating expenses are made up of three items: cost of goods sold, administrative overhead, and depreciation and amortisation. So the fuller version is:
Operating profit = Operating revenue minus (Cost of goods sold + Administrative overhead + Depreciation and amortisation)
Each item must be listed for the same period, such as a year, or the result will mix figures from different timeframes.
What goes into cost of goods sold?
Cost of goods sold includes costs directly tied to production and sales. These are labour, raw materials, inventory purchases and freight. They rise and fall with production scale, so a company that makes and sells more pays more for these items.
This makes cost of goods sold the largest and most variable part of operating expenses for many businesses. When sales fall, these costs usually fall too, but overhead and depreciation may not move in step. That mismatch is one reason operating profit can change sharply from one period to the next.
Is there a second way to calculate it?
Yes. Operating profit can be found by starting from gross profit and subtracting administrative overhead and depreciation and amortisation. Gross profit is operating revenue minus cost of goods sold, so the result is the same as the basic formula.
The second method is useful when a company’s accounts already show gross profit as a separate line. In that case, only two further subtractions are needed.
A hypothetical worked example
The figures below are hypothetical, invented only to illustrate the arithmetic. They do not describe any real company.
Suppose a hypothetical company, Example Foods Ltd, reports these figures for one year:
- Operating revenue: ₹50 lakh
- Cost of goods sold: ₹30 lakh
- Administrative overhead: ₹8 lakh
- Depreciation and amortisation: ₹4 lakh
- Interest paid on loans: ₹2 lakh (non-core, so excluded)
Using the basic method, operating expenses are ₹30 lakh + ₹8 lakh + ₹4 lakh = ₹42 lakh. Operating profit is ₹50 lakh − ₹42 lakh = ₹8 lakh.
Using the second method, gross profit is ₹50 lakh − ₹30 lakh = ₹20 lakh. Subtracting administrative overhead and depreciation and amortisation gives ₹20 lakh − ₹8 lakh − ₹4 lakh = ₹8 lakh. Both methods give the same answer. The ₹2 lakh interest does not change the result.
What are the limits of operating profit?
Operating profit does not show what remains for the owners after every cost is paid, because interest and taxes are excluded. For that, a reader needs the lines below operating profit in the same accounts.
The figure also depends on how costs are sorted into categories. Where a cost is placed, in cost of goods sold or in administrative overhead, affects the gross profit line but not the final operating profit, since both are subtracted. Operating profit is a single period’s figure, so comparing several periods gives a clearer picture than one result alone.
Frequently asked questions
Is operating profit the same as profit after tax?
No. Operating profit leaves out income and costs from investments, loans, interest and taxes, so it does not reflect those items.
Why does cost of goods sold change from period to period?
Costs such as labour, raw materials, inventory purchases and freight rise and fall with the scale of production.
Can operating profit be found from gross profit?
Yes. Subtract administrative overhead and depreciation and amortisation from gross profit to get operating profit.
What makes up operating expenses?
Operating expenses cover cost of goods sold, administrative overhead, and depreciation and amortisation.
Sources and last check
Facts in this article were checked against the sources below on 9 November 2026. Rules and figures can change; check the primary source before acting.
- groww.in (broker education)
- kotakneo.com (broker education)
- upstox.com (broker education)
- 5paisa.com (broker education)
This article is general information, not investment advice. MyFinanceBandhu is not a SEBI-registered investment adviser.