less COGS
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Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
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less or add interest
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PBT
less tax
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Operating Income or Income from continuing operations
less or add extraordinaries
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Net Income
The bottom line, refers to the net earnings or income after all expenses, taxes, and extraordinary items are factored in. The bottom line is the final "net" measure of all business activity.
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Gross profit:
This is simply the sales less the direct cost of producing the company's product or service.
Direct cost includes:
- labor,
- material, and
- expenses directly attributable to producing it.
Gross profit, often called gross margin, is the purest indicator of business productivity, because each cost dollar is directly generated by production and sale of the product.
Value investors closely watch gross margin trends as an indicator of market dominance, price control, and future profitability.
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Operating Income:
This term refers to gross profit less period expenses, such as overhead or marketing costs not directly attributable to product production.
Selling, general, and administrative expenses (SG&A) usually cover all headquarters functions, information technology, marketing, and other indirect costs.
It generally includes financing costs, such as interest, and taxes.
Amortization is usually included, because cost recovery for property, plant and equipment is part of operating expense.
Items deemed extraordinary are not included.
Operating profit gives a more complete picture of how the business is performing on a day-to-day basis.
It sometimes appears as operating income, earnings from operations, or something similar.
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Net Income:
This represents the net result of all revenues, expenses, interest, and taxes.
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There are other supplemental earnings measures, such as free cash flow and "EBITDA."
The point is that there are many ways to measure income.
Each reveals an important layer of business performance, both for determining intrinsic value and also for comparing companies.
