Operating Profit (EBIT)

Operating Profit (EBIT)

Operating profit is the profit earned through the normal operations and activities of the business. It represents the core profitability of a business before considering any financial or extraordinary items. The term EBIT stands for Earnings Before Interest and Tax, which is exactly what operating profit measures.

The key idea is that operating profit focuses only on the revenue and expenses that arise from the main business activities. When calculating operating profit, incomes and expenses of a purely financial nature are excluded. Similarly, abnormal items such as loss by fire are also not taken into account.

The Formula

Operating profit is calculated using this relationship:

Operating profit = Net Profit + Non-Operating Expenses – Non-Operating Incomes

This formula works because net profit already includes all items — both operating and non-operating. To isolate the operating profit, we add back the non-operating expenses (which reduced net profit but are not part of operations) and subtract the non-operating incomes (which increased net profit but are not from operations).

Understanding with an Example

Consider the trial balance of Ankit. It includes an item for 10% interest on a long-term loan of ₹5,000 raised on April 01, 2017. The interest works out to ₹500 (₹5,000 × 10/100). This interest is shown on the debit side of the Trading and Profit and Loss Account.

The Trading and Profit and Loss Account of Ankit for the year ended March 31, 2026 appears as follows:

From this account, the operating profit is calculated as:

Operating profit = Net profit + Non-operating expenses – Non-operating incomes

Operating profit = ₹19,000 + ₹500 – nil = ₹19,500 …