How to Calculate Your OP

Operating profit provides clues about the effectiveness of management and internal operations.

The first level of profit is referred to as gross profit. It looks at the difference between sales and the cost of sales (including labor and inventory). Operating profit (OP) is the next level of profit and is calculate by subtracting operating costs from gross profit. While gross profit provides clues about the effectiveness of a company's business model, OP provides clues about the effectiveness of management and internal operations.

Things You'll Need

• Calculator or spreadsheet

Instructions

1. Download or obtain the income statement for the company you would like to determine the OP for. You can do this from the company's investor relations website or download the 10K from your favorite investment research site/broker.

2. Subtract the cost of goods sold (COGS) from sales. This is the gross profit.

3. Subtract all operating expenses from gross profit. Operating expenses can be found just under the costs of goods sold. This is your operating profit.

4. Walk through an example. Let's say annual sales for the year are $50,000,COGS are $10,000, and operating expenses are $5,000. This means your gross profit is $40,000 ($50,000 - $10,000) and your operating profit is $35,000 or ($40,000 - $5,000).

References

• Investopedia: Operating Profit