Operating profit, one of the key indicators in the world of investment, is a must-know for stock investors. Let's learn about it together.

What is operating profit?

Operating profit is one of the key indicators for evaluating a company's business performance. It refers to the amount of money earned by a company from selling products or services, after deducting the cost of goods sold, selling expenses, and administrative expenses. In other words, it is an indicator of the profit actually earned by the company.

Operating profit plays a crucial role in judging a company's profitability. Generally, a higher operating profit indicates a higher profitability for the company. Conversely, a low operating profit or a loss suggests that the company's financial condition is unstable.

It also provides useful information to predict a company's future growth potential. Companies with consistently increasing operating profit have a competitive edge in the market and are likely to grow in the future. On the contrary, if the opposite is true, the company's competitiveness may weaken and future growth may be difficult.

It is one of the most basic elements to check when analyzing financial statements, and stock investors must understand the operating profit of the company they want to invest in.

How to find operating profit in financial statements

To find operating profit in financial statements, you need to check the company's income statement.

The income statement is a table that shows a company's business performance over a certain period. At the top, key indicators such as sales revenue, operating profit, and net income are listed. Among them, operating profit is calculated by subtracting "selling and administrative expenses" from "gross profit".

When looking for this indicator, it is important to check if each item is properly separated. Some companies may use different accounting methods, so it is a good idea to know the company's accounting standards in advance.

This allows you to easily identify the information you are looking for, and based on this data, you can analyze the company's financial soundness and growth potential.

Operating profit margin calculation method and analysis points

Operating profit margin is an indicator that shows the ratio of operating profit to sales revenue as a percentage, playing an important role in judging a company's profitability. The formula is as follows.

• Operating Profit Margin = (Operating Profit / Sales Revenue) x 100

The following points should be considered when analyzing the operating profit margin.

• Comparison with industry average: It is necessary to find out whether the operating profit margin of the company is higher or lower than the industry average. If it is higher than the industry average, it can be seen as having a competitive edge, but if the opposite is true, improvement may be needed.
• Trend analysis: By analyzing the trend of the operating profit margin over time, you can understand the company's growth potential. An upward trend is a positive sign, while a downward trend can be a negative sign.
• Comparison with competitors: By comparing the operating profit margin with that of competitors in the same industry, you can understand the company's relative position. If it is superior, it is likely to have a higher market share, and if it is inferior, efforts to enhance competitiveness may be necessary.
• Consideration of non-operating income and expenses: Operating profit margin is an indicator that does not take into account non-operating income and expenses, so it should be considered together. If there are significant non-operating expenses such as interest expenses or corporate taxes, the actual profitability may be lower.
• Elimination of one-time factors: Operating profit margin can fluctuate due to temporary factors, so it is important to eliminate these factors and understand the real profitability.

Analysis of factors causing changes in operating profit

One of the most important factors to consider when analyzing financial statements is to understand the factors that cause changes in operating profit. This provides very important information in predicting a company's future performance and making investment decisions.

The main reasons for changes in operating profit are as follows.

• Changes in sales revenue: Sales revenue can increase or decrease due to factors such as changes in sales volume or prices. Economic fluctuations, the emergence of competitors, and changes in marketing strategies can affect changes in sales revenue.
• Changes in costs: Increases or decreases in raw material prices, labor costs, rent, etc. will affect operating profit.
• Changes in selling and administrative expenses: Advertising expenses, commissions, employee benefits, etc. can increase or decrease. Expansion or contraction of the organization, changes in business strategies, etc. are factors that affect changes in selling and administrative expenses.
• Other factors: Other factors such as exchange rate fluctuations, tax payments, and lawsuits can also affect operating profit. These factors are often difficult to predict and control, so companies need to be constantly vigilant about risk management.

After identifying the causes, it is necessary to distinguish whether each cause is continuous or temporary. If it is a continuous cause, it is likely to be a structural problem of the company, so a fundamental solution is needed. If it is a temporary cause, it is likely to be a short-term issue, so it may be better to wait until the situation improves.

Investment strategies using operating profit

Operating profit is one of the most important indicators in stock investment. It can be used to develop various investment strategies.

• Growth stock investment: Companies with consistently increasing operating profit are classified as growth stocks. The stock price of these companies is generally formed at a high level, and high returns can be expected in the long term. However, growth stocks are highly volatile, so sufficient analysis and risk management are required before investing.
• Value stock investment: Companies with a low stock price relative to operating profit are classified as value stocks. A strategy to buy stocks at a relatively low price and hold them for the long term can be adopted. However, value stocks are not always a good choice. If a company's growth potential is low or its competitiveness is weak, the stock price may not rise.
• Turnaround stock investment: Companies that were losing money or whose operating profit was declining, but whose performance has improved through restructuring or business innovation, are classified as turnaround stocks. A successful turnaround is likely to lead to a rise in stock prices. However, if it fails, the stock price may fall and losses can be significant, so caution is needed.
• Dividend stock investment: Companies with stable operating profit and high dividend payments are classified as dividend stocks. They have the advantage of being able to earn higher returns than bank interest. However, it should be noted that dividend yields may decline due to factors such as interest rate hikes.

In addition to the investment strategies based on operating profit mentioned above,consider other financial ratios such as PER (price-to-earnings ratio) and PBR (price-to-book ratio)will enable you to make more sophisticated investment decisions.

Evaluating corporate health using operating profit

Operating profit is one of the key performance indicators in financial statements. Through it, we can evaluate a company's health and future growth potential.

• Operating profit is calculated by deducting the cost of goods sold, selling and administrative expenses from the company's sales revenue. In other words, it shows how much profit a company actually earned from selling products or services.
• A high operating profit means the company is running its business efficiently. Conversely, if operating profit is low or losses are being recorded, it may suggest that the company's operations are inefficient or its competitiveness is declining.
• Operating profit is also useful in predicting a company's cash flow. This is because cash generated from operating activities is used for a company's financing and investments. If operating profit is decreasing or losses are being recorded, but excessive debt is being repaid or large investments are being made, the company's financial condition is likely to worsen.
• Operating profit also plays an important role in determining a company's credit rating. Credit rating agencies consider the size and stability of operating profit, as well as its growth potential, to assign a company's credit rating. Companies with high credit ratings find it easier to raise funds and can reduce financing costs.

Therefore, stock investors should carefully review the operating profit of the companies they are interested in and use it as a basis for evaluating the company's health and developing their investment plans.

Conclusion

Today, we've learned about operating profit, an indicator of a company's growth potential.