Operating Profit vs. EBIT vs. Net Profit: Definitions and Comparison

Graziano Stefanelli
May 18
3 min read

Operating profit, Earnings Before Interest and Taxes, and Net Profit are simply three stops on the income-statement ladder;

Operating profit shows what the core business earns;

EBIT then folds in any gains or losses from side activities before interest and taxes;

Net profit is what’s left after financing costs and taxes are paid.

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1 Where each figure comes from

Step on the income statement	What it includes	What it excludes
Operating Profit (a.k.a. Operating Income)	Revenue minus: 1) cost of goods sold, 2) operating expenses (selling, G&A, R&D, depreciation, etc.)	Any non-operating income/expense (e.g., investment gains), plus all financing costs and taxes
EBIT (Earnings Before Interest and Taxes)	Operating profit plus/minus pre-tax non-operating items (royalty income, rental income, fair-value adjustments, etc.)	Interest, taxes
Net Profit (“the bottom line”)	EBIT minus interest and taxes, ± extraordinary items, discontinued operations, one-offs	—

Key distinction: Operating profit measures core-business earnings only. EBIT widens the lens by adding non-operating gains or losses that still sit above interest and taxes. In quiet companies the two figures may match, but they remain conceptually distinct.

________ 2 Visualising the flow

Revenue

– Cost of goods sold (or "Cost of Sales", in case of service business)

= Gross profit

– Operating expenses

= Operating profit ← core operations end here

± Non-operating income/expenses

= EBIT ← still before financing & tax

– Interest expense / + Interest income

– Income taxes

= Net profit

Which costs are considered operating expenses?

Salaries and wages, Rent, Utilities, Office supplies, Insurance premiums, Marketing and advertising, Research and development, Depreciation, Amortization, Equipment maintenance, Travel and entertainment, Software subscriptions, Telephone and internet, Legal and professional fees, etc.

And which are non-operating expenses and income?

Interest expense, Losses on investments, Foreign exchange losses, Restructuring charges, Legal settlements, Impairment losses, Loss on sale of assets, Fines and penalties, Debt issuance costs, etc.

Non-operating income includes:

Interest income, Dividend income, Gains on investments, Rental income (if not core business), Gain on sale of assets, Foreign exchange gains, Insurance recoveries, One-time legal awards, etc.

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3 Why analysts separate Operating Profit from EBIT

Decision point	Operating Profit	EBIT
Judge managerial control over core business	✅ Best metric	Less pure, affected by market swings
Compare divisions inside a conglomerate	✅ Non-operating items usually booked centrally	Can distort unit comparisons
Set debt covenants / credit tests	Used, but lenders often prefer EBITDA	Very common covenant when non-operating items matter
Equity valuation multiples	EV/Operating Profit filters one-offs	EV/EBIT useful if non-operating gains are recurring
Earnings volatility	More stable	Swings with FX, investment re-valuations

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4 Worked example

	Company X	Company Y
Revenue	€500 m	€500 m
COGS	300 m	300 m
Operating expenses	80 m	80 m
Operating profit	€120 m	€120 m
Non-operating investment gain	—	+ €20 m
Non-operating FX loss	– €5 m	– €10 m
EBIT	€115 m	€130 m
Interest expense	25 m	25 m
Taxes (30 %)	27 m	31.5 m
Net profit	€63 m	€73.5 m

Both firms run operations equally well, yet Company Y’s EBIT and Net Profit benefit from a €20 m investment gain that never touches Operating Profit.

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5 Common pitfalls to avoid

Assuming “Operating Profit = EBIT.” True only when non-operating items are negligible—always check the notes.
Mixing cash and non-cash measures. Depreciation lowers Operating Profit and EBIT but not immediate cash; use operating cash flow in parallel.
Ignoring recurring non-operating income. Persistent royalties or investment yields make EBIT more representative of sustainable earnings.
Blindly trusting “adjusted” figures. Management adjustments may remove costs that reappear every year; scrutinise reconciliations.

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6 When to quote each number

Budgeting, pricing, cost control → Operating Profit
Cross-industry comparisons → EBIT, because some sectors naturally book non-operating income
Assessing ability to pay interest → EBIT (and EBITDA)
Dividend policy & EPS discussions → Net Profit

Think of Operating Profit as the engine’s horsepower, EBIT as the engine plus auxiliary generators, and Net Profit as what finally lands in owners’ pockets after creditors and tax authorities take their share.