Profit

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Parker Conrad

A company's profit is the amount of money it earns each quarter. However, profit is an inherently ambiguous term, because companies generally track several different profit metrics, each of which includes certain costs but not others.

For example,

• Gross profit includes only the cost of goods sold - usually the costs of labor and materials used to produce the product. Gross profit is useful because it tells you what percentage of each dollar a company earns in revenue can be used to fund its operations - but it excludes a lot of costs of running a business - research and development, sales and marketing, etc...

• Earnings Before Interest, Taxes, Depreciation and Amortization - EBITDA includes all costs except for interest, taxes, depreciation and Amortization - EBITDA is a good measure of the cash a company is creating, and excludes items like interest, capital expenditures, etc. because they vary with a company's capital structure and are often not a good measure of the business's underlying profit potential.

• Operating Income or operating profit includes all "operating expenses" - things like marketing, research and development, capital expenditures (Amortization) and capital depreciation - but still not interest or taxes.

• Net Income includes all costs, and is the profit that is reported as Earnings Per Share (EPS) to shareholders.