Profit is the amount that remains after a company accounts for its revenues and expenses for a particular accounting period. Every company tries to maximize its profits so that it can strengthen its financial position and provide a return to its shareholders.
What does profit mean?
Profit can be calculated in different ways to help determine a company’s performance. Gross profit refers to the amount that is left after the cost of goods sold is subtracted from revenues. Operating profit refers to the profit from a company’s core operations. Operating profit doesn’t take financial costs into account and is also called EBITA – Earnings before interest, tax, depreciation, and amortization. Finally, net profit is calculated by considering all costs. It is also referred to as net income and is the sum that can be distributed to shareholders in the form of a dividend. Remember that a company’s profit and its cash balance will not be the same. As companies follow the accrual system of accounting, expenses that have been incurred but not paid for need to be deducted from revenues to arrive at the profit figure. Similarly, an advance received from a customer cannot be considered as revenue. It will be booked only when the sale takes place.
Example of profit
Many of the world’s largest companies are highly profitable. Their products and services are sought after, and they can charge a premium because of the goodwill and strong brand reputation that they have built over the years. The most profitable company in the world is reportedly government-owned Saudi Aramco, an oil and gas firm. It made a profit of $33.8 billion in the first half of 2017. However, it is not a public company but is planning an IPO soon. Here is a partial list of the world’s high-margin companies: ⇨ Apple: The giant firm that makes the iconic iPhone made a profit of $53.3 billion in 2017. ⇨ ICBC: The Industrial and Commercial Bank of China is a financial behemoth with yearly profits of $43.7 billion. ⇨ Berkshire Hathaway: This American conglomerate headed by the Warren Buffett made annual profits of $39.7 billion. ⇨ China Construction Bank: One of the “big four” Chinese banks, it made profits of $37.2 billion in 2017.
The amount of profit that a company makes is a critical indicator of its financial health. Investors and analysts track this figure very carefully.