Definition (canonical)
Profit is what remains of revenue after costs are deducted. It is the fundamental measure of whether a business model works — but "profit" is not one number. Gross, operating and net profit each subtract a different layer of costs and answer a different question.
The three layers of profit
| Layer | Formula | Question it answers |
|---|---|---|
| Gross profit | revenue − cost of goods sold | Is the product itself profitable? |
| Operating profit | gross profit − operating expenses | Does the business work day to day? |
| Net profit | operating profit − interest, taxes, one-offs | What actually belongs to the owners? |
A worked example: a store sells goods for 100k, which cost 60k to buy (gross profit 40k), spends 25k on rent, salaries and marketing (operating profit 15k), then pays interest and tax of 5k — net profit 10k. Each layer can hide a different problem: healthy gross with negative operating profit means overheads are eating the business; healthy operating profit with weak net profit points at expensive debt.
Retained vs distributed
Net profit faces one more decision: pay it out to owners (dividends) or retain it to fund growth. Retained earnings accumulate in equity on the balance sheet and are the cheapest financing a company will ever get — no interest, no dilution. Mature businesses tend to distribute a steady share of it; growing ones plough every unit back into the engine. A long record of retained, well-reinvested profit is among the strongest signals of a durable company.
Why profit can mislead
Profit is an accounting opinion; cash is a fact. Revenue booked before payment, depreciation schedules and one-off events all shape the bottom line without touching the bank account — which is why profitable companies still fail when cash flow turns negative. Comparing across firms, analysts often prefer EBITDA to strip out financing and accounting choices, and track margins rather than absolute amounts.
FAQ
Is a profitable company always safe? No — profit with poor liquidity has killed countless firms. Read profit together with cash flow, always, and treat the pair as one dashboard rather than two separate reports.
What is a "good" net margin? Entirely industry-dependent: grocery retail lives on 1–3%, software can exceed 20%. Compare within your sector, not across it.
Profit vs profitability? Profit is an amount; profitability is a ratio (profit ÷ revenue or capital). A bigger company almost always has more profit — profitability tells you who runs a better business.
Related: Revenue · Margin · EBITDA · Cash Flow Reviewed: 2026-07-15 · Sources: IAS 1