Table of Contents

How Gross, Operating, and Net Profit Differ

By

Will Kenton

Updated June 26, 2025

Reviewed by

David Kindness

Fact checked by

Suzanne Kvilhaug

Definition

Profit refers to a company's surplus revenue after accounting for its costs and expenses during a certain period, such as a quarter or fiscal year.

What Is Profit?

A profit occurs when a company's revenue exceeds its expenses. Put simply it's what a business gets to keep after paying for everything it takes to make or sell its products or services. There are different types of profit. Gross profit is what a business earns after deducting all of its costs of goods sold (COGS). Operating profit is the money it earns from its day-to-day activities and excludes interest and taxes. Net profit is what's left over after paying all of its costs. A highly profitable company is better poised to manage its costs and financial obligations. Companies often share their profits with their shareholders or reinvest them into the business.

Key Takeaways

Profit refers to the money companies keep after paying all of their expenses.
Gross profit equals sales minus the cost of goods sold.
Operating profit accounts for expenses like overhead and depreciation.
Net profit is also referred to as the bottom line.
Companies can distribute profits to shareholders as dividends or reinvest them back into the business.

How Profit Is Calculated

Profit is the money a business pulls in after accounting for all expenses. Whether it's a lemonade stand or a publicly-traded multinational company, the primary goal of any business is to earn money.

Some analysts look at top-line profitability, whereas others are interested in profitability before taxes and other expenses. Still others are only concerned with profitability after all costs have been paid.

The three major types of profit are gross profit, operating profit, and net profit, found on a company's income statement. Each profit type provides analysts with more information about a company's performance compared to competitors.

Fast Fact

The word “profit” comes from the Latin noun profectus, meaning “progress,” and the verb proficere, meaning “to advance.”

Gross Profit

The first level of profitability is gross profit, which equals sales minus the cost of goods sold. Sales are the first line item on the income statement, and the cost of goods sold (COGS) is generally listed just below it:

Gross Profit = Revenues - COGS

For example, if Company A has $100,000 in sales and a COGS of $60,000, it means the gross profit is $40,000, or $100,000 minus $60,000. Divide gross profit by sales for the gross profit margin, which is 40%, or $40,000 divided by $100,000.

Operating Profit

Operating profit removes operating expenses such as overhead and other indirect costs, as well as accounting costs like depreciation and amortization. Operating profit is sometimes referred to as earnings before interest and taxes, or EBIT.

Operating Profit = Revenue - Cost of Goods Sold (COGS) - Operating Expenses - Depreciation & Amortization

Net Profit

Net Profit = EBIT - Interest Expense - Taxes

Net profit removes the costs of interest and taxes paid by the business. Because it falls at the bottom of the income statement, it is sometimes referred to as the firm's "bottom line."

The bottom line shows how profitable a company was during a period and what is available for dividends and retained earnings. What's retained can be used to pay off debts, fund projects, or reinvest in the company.

Important

An increasing bottom line is a sign that a company is growing, while a shrinking bottom line could be a red flag.

How Do Public Companies Report Profit?

The U.S. Securities and Exchange Commission requires public companies to disclose their financial statements in an annual report on Form 10-K. The form gives a detailed picture of a company’s operating and financial results for the fiscal year.

What Is the History of Profit?

In a capitalist system where firms compete with one another to sell their goods, profits have been studied by economists. Karl Marx argued that profits arise from surplus labor extracted from workers by business owners. Modern thinkers suggest that profits compensate for the risk that entrepreneurs take on when starting a business. Others argue that profits arise from inefficient markets and imperfect competition.

What Is the Corporate Tax Rate on Profits?

In 2025, the corporate tax rate on profits is 21%, reduced from 35% in the 2017 Tax Cuts and Jobs Act.

The Bottom Line

Profit is usually measured as revenue minus expenses. Companies can further calculate profit, accounting for specific costs. Gross profit is the amount a business has earned minus the direct costs of manufacturing. Operating profit is the gross profit minus operational expenses. Net profit is what remains after the business accounts for all deductions, including interest and taxes.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

U.S. Securities and Exchange Commission. "How To Read a 10-K," Page 1.
Makadok, Richard. "Invited Editorial: The Four Theories of Profit and Their Joint Effects." Journal of Management. vol. 37, no. 5, 2011, pp. 1316-1334.
Tax Policy Center. "How Does the Corporate Income Tax Work?"

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