Operating profit – Meaning & Formula

Operating profit is the excess of net revenue over COGS and operating expenses of a company. Operating expenses include selling, general and administrative expenses. These expenses are not directly associated in production of goods or services.

It refers to that amount of profit which is remained after deducting both direct and indirect expenses however, accounts for interest and taxes. For this reason, it is also known as EBIT (Earnings before interest and tax).

Formula for the calculation of operating Profit:

EBIT is the difference between gross profit and operating expenses of a company. Therefore, the formulas which can be used in calculation are:

Net revenue – (COGS + Operating expenses)

Or

Gross profit – Operating expenses

Cost of goods sold (COGS) = Opening stock + Purchases – Closing stock

Example:

From the figures given in income statement of XYZ ltd, EBIT can calculated as:

Gross profit = 75,000

Operating expenses = 22,000

Operating profit = 75,000 – 22,000 = 53,000

This figure is used in the calculation of net profit and operating profit margin.

Profitability Ratios – Meaning & Types

Profitability ratios are financial ratios used to measure the ability of a company to generate profit. These ratios can also be used to compare a company’s performance against other comapnies in same industry.

Types of profitability ratios:

The below are the important types of profitability ratios:

1. Gross profit margin,
2. Operating profit margin,
3. Net profit margin,
4. Return on investment (ROI),
5. Return on assets and
6. Return on equity

Types of share capital with example

Before reading the different types of share capital, it is advisable to know the meaning of share capital.

Meaning of share capital:

Share capital is the sum of money received by a company by selling its shares to the investors. When a company issues fresh share to the investors and raises fund, it directly increases the value of share capital.

The amount of total share capital cannot be more than the amount of authorized share capital of a company. Increase in market price of shares does not affect the value of share capital because share capital is calculated based on the par value of shares and not on the basis of market price.

Share capital is shown on the balance sheet of a company.

Types of share capital:

Share capital can be categorized as authorized share capital, issued share capital, subscribed share capital, called up share capital and paid up share capital.

Authorized:

Authorized share capital refers to the total capital that a company is authorized to accept from investors by issuing shares. In simple terms, a company cannot raise capital more than its authorized capital.

It represents the capital with which a company is registered that’s why it is also known as ‘registered capital’.

Issued:

It represents that part of total authorized share capital which has been issued by a company for subscription by investors. Usually, companies do not issue all of their shares for control purpose. Thus, the part which is issued represents the issued share capital.

Subscribed:

It refers to that part of issued share capital, which has been subscribed by investors. It means when a company issues shares to raise capital, it may or may not receive subscriptions for all of its shares. The part of issued share capital for which subscription has been received is known as subscribed share capital. So subscribed share capital can be equal to subscribed share capital but not more than that.

Called up:

In general practice, a company collects the full amount of share price in more than one lot. The part of subscribed share capital which has been asked for payment represents called up share capital.

Paid up:

One of the types of share capital, paid up capital represents that part of called up share capital which has been paid by investors.

Paid up capital = Called up capital – Call in arrears.

Example of different types of share capital:

Suppose ABC Ltd. is registered with a capital of Rs 1,00,00,000 divided into shares of Rs 10 each. The company issued 8,00,000 shares to raise a fund of Rs 80,00,000 but investors subscribed for 6,00,000 shares. The company asked for Rs 4 per share out of Rs 10 (Nominal value of shares) and it received payment for only 5,50,000 shares.

Now,

Authorized share capital (10,00,000 shares of 10 each) = 1,00,00,000

Issued share capital (8,00,000 shares of 10 each) = 80,00,000

Subscribed share capital (6,00,000 shares of 10 each) = 60,00,000

Called up share capital (6,00,000 × 4) = 24,00,000

Paid up share capital (5,50,000 × 4) = 22,00,000

Call in arrears (50,000 × 4) = 2,00,000