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Operating Expenses & Operating Profit

beginner6 min read

The cost of running the business day to day, and the profit from its core operations.

After gross profit, subtract the costs of running the business — salaries, marketing, rent, R&D, admin (often called SG&A). What remains is operating profitEarnings before interest, tax, depreciation, amortisation., also called EBIT (Earnings Before Interest and Tax).

Operating profitEarnings before interest, tax, depreciation, amortisation. is arguably the truest measure of a company’s core business performance — it strips out how the company is financed (interest) and tax quirks, leaving just: does the actual business make money? When comparing two companies, operating marginOperating profit as a percentage of revenue. is often the fairest fight.

Operating marginOperating profit as a percentage of revenue. (operating profitEarnings before interest, tax, depreciation, amortisation. ÷ revenue) tells you how efficiently the company converts sales into core profit. Rising operating marginOperating profit as a percentage of revenue. as revenue grows is the hallmark of “operating leverageControlling a large position with a small amount of money.” — a great sign.

Key takeawayOperating profitEarnings before interest, tax, depreciation, amortisation. (EBIT) = gross profit − operating expenses; it isolates how well the core business performs, before financing and tax.
FAQs
What is operating leverage?

When a company’s fixed costs stay flat as revenue grows, each extra sale adds more to profit than the last — so operating margin expands as the business scales. It works in reverse too: when sales fall, profit drops faster.