What is the difference between the following accounting measures, if any?
- Gross profit
- Operating profit
- Net profit/income
- EBIT
- EBITDA
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$\begingroup$ This is probably a very google-able question, but you've given me the chance to post this: youtube.com/watch?v=Ck3pfC4m5hE $\endgroup$– Kitsune Cavalry ♦Jun 29, 2016 at 21:52
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$\begingroup$ Funny :) But says nothing about the difference to the other measures mentioned above... $\endgroup$– jeffreyJun 29, 2016 at 22:04
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2 Answers
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So, here goes:
Gross Profit = Revenue - COGS (Cost of Goods Sold)
If you bought an orange for a dollar and sold it for two, you have one dollar of Gross Profit
Operating Profit = Gross Profit - Labor - SG&A
If you're business paid someone \$100 to sell 200 oranges (like above), you would have \$200 in Gross profit, and \$100 in Operating Profit (assuming no other overhead like licenses, etc) for that business line. Operating Profit can be for a firm, business line, or whole company. Depreciation and Amortization can be included here for assets and debts in service to the entity or business line in question.
Typically Operating Profit tells whether a business line, unit, or company is profitable (independent of interest and taxes as explained below in the EBIT section).
Operating Profit and EBIT are not completely interchangeable in common parlance, though, as EBIT is typically used only for a company and Operating Income is often used both for Companies, and individual product lines within the company.
EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortization
If the same business paid \$10 to incorporate, that would come out here, so your company's EBITDA would be \$90.
EBIT includes Depreciation and Amortization
If you'd also used your \$100 office (independent of the orange selling operation or it would have also been in the orange selling Operating Profit line) for 1/100 of it's operating life, you would have \$1 in depreciation. Bringing your EBIT down to \$89. EBIT is almost always a company level statistic, and rolls up all Depreciation, Amortization, and costs other than Interest and Taxes.
The reason people analyze EBIT, is that it gives you a feeling for if the company could be profitable if moved to a different tax jurisdiction, or if its WACC (weighted average cost of capital) were changed through recapitalization.
Net Profit = EBIT - Interest - Taxes
So if you'd paid \$1 in interest on a \$100 loan to buy the oranges in the first place, you're pre-tax income would be \$88, which you would report to the appropriate tax agency, assuming a 35% corporate tax rate, you'd pay \$30.80 in taxes, leaving you a Net profit of \$57.20.
This is usually the "bottom line" of an income statement.
answered Jun 30, 2016 at 14:38
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$\begingroup$ Thanks for your great answer! Is EBIT(DA) always before dividend payments to the shareholders? $\endgroup$– jeffreyJul 3, 2016 at 15:53
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1$\begingroup$ Yes. Dividend receiving shareholders are always last in liquidation order, so they cannot be paid until after interest. It would be strange to consider a dividend before interest because interest could preclude its payment. $\endgroup$ Jul 4, 2016 at 2:29
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- Gross profit = revenue - cost of goods sold (COGS)
- Operating Profit (also known as EBIT or operating income) = Operating Revenue - COGS - Operating Expenses - Depreciation & Amortization
- Net income (also known as net profit) = EBIT - Interest - Taxes
Operating expenses: include rent, equipment, inventory costs, marketing, payroll, insurance and funds allocated toward research and development
For EBITDA, I guess you can find it on your own !
