Profound profit is a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.
Profound profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profound profit that is gained goes to the business’s owners, who may or may not decide to spend it on the business. Profit is calculated as:
Profit = Total Revenue – Total Expenses
Profound profit is the money a business makes after accounting for all expenses. Regardless of whether the business is a couple of kids running a lemonade stand or a publicly traded multinational company, consistently earning profit is every company’s goal. As a result, much of business performance is based on profitability in its various forms. Some analysts are interested in top-line profitability, whereas others are interested in profitability before expenses, such as taxes and interest, and still others are only concerned with profitability after all expenses have been paid.
There are three major types of profound profit that analysts analyze: gross profit, operating profit and net profit. Each type of profit gives the analyst more information about the company’s performance, especially when compared against other time periods and industry competitors. All three levels of profitability can be found on the income statement.
Gross, Operating and Net Profit
Gross profit (also called sales profit and gross income) is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company’s income statement, and can be calculated with this formula:
Gross Profit = Revenue – Cost of Goods Sold
Operating profit is calculated by deducting operating expenses from gross profit. Gross profit looks at profitability after direct expenses, and operating profit looks at profitability after operating expenses. These are things like salaries, general and administrative costs, also referred to as SG&A. If company A has $20,000 in operating expenses, the operating profit is $40,000 minus $20,000, equaling $20,000. Divide operating profit by sales for the operating profit margin, which is 20%.
Net profit is the income left over after all expenses, includes taxes and interest, have been paid. If interest is $5,000 and taxes are another $5,000, net profit is calculated by deducting both of these from operating profit.
Net Profit Margin
Net profit margin is the ratio of net profits to revenues for a company or business segment . Typically expressed as a percentage, net profit margins show how much of each dollar collected by a company as revenue translates into profit. The equation to calculate net profit margin is:
Net Profit Margin = Net Profit ÷ Revenue
Accounting profit is a company’s total earnings, calculated according to generally accepted accounting principles (GAAP). It includes the explicit costs of doing business, such as operating expenses, depreciation, interest and taxes. Accounting profit differs from economic profit in that accounting profit only represents the monetary expenses a firm pays and the monetary revenue it receives; it tends to be higher than economic profit since it omits certain implicit costs, such as opportunity costs. Accounting profit can be thought of as bookkeeping profit. It is the net income earned by a company after subtracting all dollar costs from its total
Marginal profit is the profit earned by a firm or individual when one additional unit is produced and sold. It is the difference between marginal cost and marginal product (also known as marginal revenue), and is often used to determine whether to expand or contract production, or to stop production altogether. Under mainstream economic theory, a company will maximize its overall profits when marginal cost equals marginal product, or when marginal profit is exactly zero.
Marginal profit is different from average profit, net profit, or other measures of profitability in that it looks at the money to be made on producing one additional unit. It accounts for scale of production because as a firm gets larger, its cost structure changes – and, depending on economies of scale, profitability can either increase or decrease as production ramps up.
Profitability ratios are a class of financial metrics that are used to assess a business’s ability to generate earnings compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor’s ratio or relative to the same ratio from a previous period indicates that the company is doing well.
Some industries experience seasonality in their operations. The retail industry, for example, typically experiences higher revenues and earnings for the Christmas season. It would not be useful to compare a retailer’s fourth-quarter profit margin with its first-quarter profit margin. Comparing a retailer’s fourth-quarter profit margin with the profit margin from the same period a year before would be far more informative.
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