Gross profit, operating profit and profit

The statement of profit or loss moves from revenue to profit through a series of subtotals, each answering a different question:

• Gross profit = revenue − cost of sales. How much the entity earns on what it sells, before running costs. Gross margin = gross profit ÷ revenue. It moves with selling prices, purchase and production costs, sales mix and inventory write-downs.
• Operating profit — the result of the entity's main business activities after selling, distribution, administrative and other operating expenses (including depreciation, impairment of receivables and most gains or losses on disposing of operating assets). Operating margin = operating profit ÷ revenue.
• Profit before tax — after investment income and finance costs. Moves with how the business is financed, not how well it operates.
• Profit for the year — after income tax. The figure that flows to retained earnings and into earnings per share.

What changes with IFRS 18. Under IAS 1, "operating profit" isn't defined, so companies have presented it in different ways — or not at all — which makes comparisons unreliable. *IFRS 18 Presentation and Disclosure in Financial Statements* replaces IAS 1 for annual periods beginning on or after 1 January 2027 (earlier application permitted; comparatives restated). It requires income and expenses to be classified into operating, investing, financing, income taxes and discontinued operations categories, and introduces two required subtotals: - Operating profit — all income and expenses in the operating category. Operating is the default category: anything not classified elsewhere goes here, including volatile or unusual items. - Profit before financing and income taxes** — operating profit plus the investing category (for a typical company: income from investments such as dividends, interest on cash and cash equivalents, and investment property).

Financing then picks up interest expense on borrowings and similar items. Entities with specified main business activities — banks, insurers, investment entities — classify some investing and financing items in operating instead. IFRS 18 also requires disclosure of management-defined performance measures (such as an "adjusted operating profit") in a single note, reconciled to the IFRS subtotals. EBITDA is not a defined IFRS subtotal.

Reading the measures together. A rising gross margin with a flat operating margin means running costs are absorbing the gain; a falling gross margin with a stable operating margin often signals a mix shift towards lower-margin products sold more cheaply to run. Always ask which line moved before concluding why profit moved.

US GAAP has no equivalent defined operating profit subtotal; ASC 220 and SEC rules govern presentation for US filers. FASB ASU 2024-03 adds required note disaggregation of specified expense captions (such as purchases of inventory, employee compensation and depreciation) for public business entities, for annual periods beginning after 15 December 2026.