Operating profit

Profit from the business's operations after operating expenses but before interest and tax. Financing choices do not reach it, which is why it is the line to compare across firms.

Where you will meet it

Operating profit appears in 8 learning outcomes on the CFA syllabus. A few of them:

• Set out the parts that make up an income statement
  CFA Level I · Financial Statement Analysis

  “Revenue sits at the top; subtracting cost of goods sold gives gross profit, and subtracting operating expenses gives operating profit.”

• Work out return on invested capital and explain what it reveals
  CFA Level I · Corporate Issuers

  “Return on invested capital measures how much after-tax operating profit a business earns on all the capital provided by lenders and shareholders: ROIC = NOPAT / average invested capital, where NOPAT = EBIT x (1 - tax rate).”

• Set out ways of projecting FCFF and FCFE
  CFA Level II · Equities

  “The more detailed way forecasts the components: sales growth drives operating profit through a margin, and fixed and working capital investment are set as percentages of the increase in sales.”

• Explain what to consider about post-employment benefits when modelling and valuing a company
  CFA Level II · Financial Statement Analysis

  “The trap is treating a high expected return as real operating profit.”

Learn it properly

• DuPont analysis explained: what is behind a return on equity Guide

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with O · Glossary