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Leroy Ross
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Leroy Ross   My Press Releases

This is How I Profit.!!

Published on 4/21/2015
For additional information  Click Here


 
Get Rid of Profit Confusion Forever:
 
 Gross, Operating, and Net Profits



A prudent investor will always investigate and analyze a company before investing his money in that company’s stock. Most investors will review the company’s annual report and take a gander at the income statement.


In most cases we start at the top (total revenue), look at all the expenses, and then focus on the net profit at the bottom of the statement. The general idea being, if the net profit is greater than last year, the company is growing and becoming more successful. But is that really true?

 

It’s actually more complex than that. Good investors will consider more than just the net profit. They will also look at the operating profit (operating income) and the gross profit (gross income). Both of these convey Important information about the company’s level of success.


Gross Profit
The top line of an income statement is the Revenue or Net Sales. This is simply the total amount of revenue the firm has generated over the given period of time. There is another line item referred to as Cost of Goods Sold. These are all the expenses generated by the actual production of the product or service. It includes things like the wages and salaries of those working in the direct production of the product, as well as the raw materials used.


Gross profit is simply what is left over when the Cost of Goods Sold is subtracted from Revenue.

Operating Profit

Another item on an income statement is Operating Expenses. It is sometimes referred to as SG&A (Selling, General, and Administrative Expenses). This covers most of the other business expenses.

These Operating Expenses include the cost of the sales personnel, marketing, executives, administrative buildings, and more. When Operating Expenses are subtracted from Gross Profit, you are left with Operating Profit.




Net Profit
There are also expenses not related to the operation of the core business. These are things like interest expenses, taxes, and any other unusual expenses or gains (like the sale of part of the business). When all of these expenses are subtracted from the Operating Profit, what remains is the Net Profit.

The Relevant Differences
While all 3 types of profit are important, any one of them can be misleading depending on the circumstances.

Perhaps the net profit for this year is substantially higher than it was for the previous year. On the surface, this might appear to be great. But if that increase is due to a one-time event, like spinning off a business, that increase can’t be counted on from year-to-year. In this instance, operating profit would be a more meaningful measure.

Perhaps operating profit looks good. But you might find that the cost of goods sold is creeping up while sales are the same (gross income is falling). However, operating profit is holding because SG&A is falling. This suggests that cost cutting measures are in place.

In this example, sales are constant, cost of goods sold is increasing, and cost cutting measures are already in place. This suggests that the company is likely heading for trouble
.
Knowing about the 3 different types of profit can provide an inside look at what’s really going on within a company. It’s always good to look at the bottom line, but that only gives you part of the picture.

Always be aware of the trends and the numbers behind those trends. Also be aware of the one-time expenses and income that might not mean as much in the long-term. If you examine all the profit metrics, you’ll strengthen your chances of picking a winner by leaps and bounds.


Leroy Ross
 
 
 

 


 
 
 
 
 
 
 
 
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