Formula to Calculate Profit
Profit Formula calculates the net gains or losses incurred by the company for any given period by subtracting total expenses from total sales. Profit is the key indicator of the performance of any company. Profit is considered as the key component of Operating margin, Earning per share, profitability ratios, etc. There are various statutory guidelines and local GAAPs, which all the corporations have to follow while calculating the profits for any given period. This not only ensures the transparency but also allows the better comparability in the results of the company.
Profit is the walkthrough through which any non-professionals can understand how the company has arrived at a profit after tax (PAT), profit before tax (PBT), Earnings before interest tax depreciation and amortization (EBITDA).
The formula for profit is:
Steps to Calculate Profit
Below is the detailed explanation of the steps of Profit equation:
Step 1: Determine the total revenue of the company from the core business activity.
Step 2: Then, from revenue, deduct the total cost of revenue incurred for earning the gross revenue of the company; this will help in arriving at gross profit and gross margin. Cost of revenue includes Salary cost, finance expense, cost of inventory and such expense directly related to the business.
Step 3: From gross profit, deduct below expense:
- Selling and maintenance expense
- General and Administration expense
- Depreciation and Amortization
- Research and Development Expense.
This will give the Operating income of the company.
Step 4: To Operating income, Add Other income like interest, profit on the sale of the investment, etc, to arrive at Profit before taxes.
Step 5: From Profit before tax, deduct tax provision for the given period. This will give profit after tax.
Step 6: Every business will have few unwanted gain or losses incurred during the financial year, which are not ordinary in nature like the bankruptcy of the debtor, winning/losing of any legal suit, etc. Adjust such extraordinary item to Profit after tax, which will provide income attributable to shareholders.
Calculation Examples of Profit
Let’s see some simple to advanced examples of the profit equation to understand it better.
Profit Example #1 – Microsoft Incorporation
Below are the various incomes and expense of Microsoft Inc., calculate profit attributable to the shareholders:
Solution:
As per the given profit equation, Operating Income can be derived as follows:
Operating Income = 12789 – 1144 – 1200 – 452 -306
Operating Income = 9687
Calculation of profit income attributable to shareholders can be done as follows:
Income Attributable to Shareholders = 9687 + 122 + 219
Income Attributable to Shareholders will be –
Income Attributable to Shareholders = 10028
Thus, Microsoft Inc has earned profit from operating income of $ 9687million dollar for the given period and $ 10,028 Million of profit attributable to shareholders.
Profit Example #2 – Alphabet Inc
Below are the particulars of Alphabet Inc., for the financial year:
Bifurcate the expense under different heads and calculate the profit attributable to shareholders.
Solution:
As per the given profit formula, Operating Income can be derived as follows:
Operating Income = 15619 – 1434 – 1918 – 403 – 1691 – 1504 – 566 – 4012 – 4162 – 383
Operating Income = -454
Calculation of profit loss attributable to shareholders can be done as follows:
Loss Attributable to Shareholders = -454 + 274 + 152
Loss Attributable to Shareholders will be –
Loss Attributable to Shareholders = -28
Explanation:
All the expense are bifurcated into various heads if expense based on their nature. While bifurcating the expense, one has to keep in mind whether the expense is directly related to operations or not. If it is directly related to operations, then it will form part of the cost of revenue. Otherwise, It will form part of either Selling and maintenance, General & Administration expense, etc, which are considered as below the line expense.
Thus, Alphabet Inc has incurred a loss from operations of $ 454 million dollars for the given period and loss of $ 28 Million dollars for the given financial year.
Profit Example #3 – Apple Inc
Below are the particulars of Apple Inc., for the financial year:
Bifurcate the expense under different heads and calculate the profit attributable to shareholders.
Solution
As per the given formula, Operating Income can be derived as follows:
Operating Income = 17832 – 1738 – 2324 – 2049 – 1823 – 686 – 22 – 5044 – 488
Operating Income = 3658
Calculation of profit income attributable to shareholders can be done as follows:
Income Attributable to Shareholders = 3631 + 111 – 1863
Income Attributable to Shareholders will be –
Income Attributable to Shareholders = 1879
Explanation:
All the expense are bifurcated into various heads if expense based on their nature. While bifurcating the expense, one has to keep in mind whether the expense is directly related to operations or not. If it is directly related to operations, then it will form part of the cost of revenue. Otherwise, It will form part of either Selling and maintenance, General & Administration expense, etc, which are considered as below the line expense.
Thus, Apple Inc has earned profit from operations of $ 3658 million dollars for the given period and profit of $ 1879 Million dollars for the given financial year.
Profit Example #4 – Amazon.in
Below are the particulars of Amazon.in., for the financial year:
Bifurcate the expense under different heads and calculate the profit attributable to shareholders.
Solution
As per the given formula, Operating Income can be derived as follows:
Operating Income = 9179 – 869 – 911 – 2522 – 1162 – 1024 -2372
Operating Income = 319
Calculation of profit income attributable to shareholders can be done as follows:
Income Attributable to Shareholders = 140 + 55 – 931 + 953
Income Attributable to Shareholders will be –
Income Attributable to Shareholders = 217
Explanation:
All the expense are bifurcated into various heads if expense based on their nature. While bifurcating the expense, one has to keep in mind whether the expense is directly related to operations or not. If it is directly related to operations, then it will form part of the cost of revenue. Otherwise, It will form part of either Selling and maintenance, General & Administration expense, etc, which are considered as below the line expense.
Thus, Amazon.in, has earned profit from operations of $ 319 million dollars for the given period and profit of $ 217 Million dollars for the given financial year.
Relevance and Uses
To determine the correct profit formula is of utmost importance as:
- Profit is considered a key indicator of Operating margin.
- Profit is considered as one of the key measuring areas in competitor analysis.
- Borrowings are sanctioned based on the operating profitability of the company.
- The profit helps in determining the foreseeable future of the company.
- Profit is important to take the strategic decision like to continue the line of business or to diversify or divest the business segment.
Conclusion
Profit formula plays a major role in any income statement, as this will form the base to determine the operational matrix of the company.
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