Operating profit margin, which is also referred to as operating profit, is the difference between total revenue and the gross profit. In business and accounting, operating profit is a measurement of a company’s profit, which includes all revenues, expenses minus expenses and interest expenses. This includes the income from debt and equity. Operating profit is the amount by which gross profit exceeds the amount by which total revenue. Thus, if a company has a low operating profit, it means that the company makes little profit from its activities and hence has a low operating profit margin.
The companies with low operating profit margins are termed as low-cost carriers or producer, while those with high profit margins are termed as high-cost carriers or producer. A low-cost carrier will sell the products at lower prices and hence will have higher operating profit margins. On the other hand, a high-cost carrier will sell its products at higher prices and hence will have lower operating profit margins.
A company may have low operating profit because it has huge expenditure on buying raw materials and developing the products. These should be taken into consideration when calculating the operating profit. The gross profit of the operation will be less than the total profit of the business. Sometimes, the gross profit is calculated in terms of the cost of sale only. However, the gross profit should be compared against the revenue to get the exact figure.
In addition, there is also one more important reason for low operating profit margin. It could be the case that the product or the service has been supplied but not purchased by the customer. This means the cost of supply is much higher than the cost of production of the same good. Hence, the operating profit margin of the company would be lower.
Usually, there are three types of profit margins: gross profit margin, gross and net profit margin. The gross profit margin includes the value earned before taxes from the sale of product or service. The gross profit margin can be negative or positive depending upon the type of business and the customers. Positive profit margin indicates that you earn more money than you spend. Positive profit margin means your business has made good profits.
On the other hand, the gross and net profit margin indicate the difference between actual and net profit. Net profit margin is the value obtained after expenses are deducted. Thus, the actual price paid by the customer is greater than the market price when the goods are sold to the customers. Net profit indicates the value of sales less the expenses incurred for the supply of the items to the customers. Thus, the net profit will show a positive difference between actual and net profit. Sometimes, the word net profit is written with the term minus profit in order to show the difference between the net income and the profit earned.
A business’s profit margin is the total amount of profit realized from sales less the total expenses incurred for the supply of the items to the customers. The business’s expenses include the payment of wages to workers and salaries to managers and executive officers. In some cases, there are also additional charges such as property rent, mortgage interest, utility bills and personal expenses. Different businesses have different profit margins, so they may have different measures of profit.
Many people are confused by the term what is operating profit. They think that it is the actual amount of profit earned by the business. However, the profit figures reported by different businesses are different. The standard profit statement reports the gross profit, current and ongoing expenses, and net profit after all direct operations are deducted. These are referred to as the operating profit ratios.