What is the relationship between gross profit and operating profit?

Gross profit and operating profit are two key financial metrics, and understanding their relationship is crucial for analyzing a company's profitability.

Gross profit is determined by subtracting the cost of goods sold (COGS) from total revenues. It reflects how efficiently a company is producing and selling its products, providing a snapshot of the fundamental profitability of the core business operations.

Operating profit, on the other hand, goes a step further by accounting for operating expenses, which include selling, general, and administrative expenses (SG&A), as well as any other expenses directly related to the operation of the business. To arrive at operating profit, you subtract these operating expenses from gross profit.

Thus, the statement that operating profit is gross profit minus expenses accurately captures this relationship. It highlights that while gross profit indicates how much money a company makes from its core operations after covering the direct costs of production, operating profit reveals how much of that gross profit remains after covering the necessary costs to run and manage the business effectively.

This distinction is essential for analyzing a company's overall performance, as it allows stakeholders to assess not only the profitability of sales but also the efficiency of the business's operations.