Finance⏱ 6 min read
How to Calculate Profit and Loss: A Complete Guide
Gross profit, operating profit, net profit, and EBITDA each tell a different part of the story. Here is how to calculate all four from a set of financial figures and what each reveals.
Profit is not one number -- it is a cascade of numbers, each removing different costs to reveal different aspects of a business's performance. Understanding all four levels is essential for financial analysis.
The Profit and Loss Structure
Revenue (Turnover)
minus Cost of Goods Sold (COGS / Direct costs)
= GROSS PROFIT
minus Operating Expenses (Overheads)
= OPERATING PROFIT (EBIT)
minus Interest Expense
= PROFIT BEFORE TAX (PBT)
minus Corporation Tax
= NET PROFIT (PAT -- Profit After Tax)
Each level answers a different question.
Gross profit: is the core product/service profitable?
Operating profit: can the business cover its overheads?
Net profit: what does the owner actually keep?
Gross Profit
Gross Profit = Revenue - Cost of Goods Sold (COGS)
Gross Margin % = (Gross Profit / Revenue) x 100
COGS includes:
- Raw materials and components
- Direct labour (production workers)
- Manufacturing overhead directly attributable to products
Does NOT include: office rent, admin salaries, marketing, finance costs
Example:
Revenue: £500,000
COGS (materials, direct labour): £320,000
Gross Profit: £180,000
Gross Margin: (180,000/500,000) x 100 = 36%
Typical gross margins by sector:
Software: 70-90% | Retail: 25-50% | Manufacturing: 20-40%
Restaurants: 60-70% (food only) | Construction: 15-25%
Operating Profit (EBIT)
Operating Profit = Gross Profit - Operating Expenses
Operating Margin % = (Operating Profit / Revenue) x 100
Operating expenses include:
- Rent and utilities
- Admin and management salaries
- Marketing and sales costs
- Depreciation and amortisation
- R&D costs
Continuing example:
Gross Profit: £180,000
Operating expenses: £95,000
Operating Profit (EBIT): £85,000
Operating Margin: (85,000/500,000) x 100 = 17%
Net Profit
Net Profit = Operating Profit - Interest - Tax
Net Margin % = (Net Profit / Revenue) x 100
Interest expense: £8,000 (on business loans)
Profit Before Tax: £85,000 - £8,000 = £77,000
Corporation Tax (25%): £19,250
Net Profit: £77,000 - £19,250 = £57,750
Net Margin: (57,750/500,000) x 100 = 11.55%
For every £100 of revenue, £11.55 reaches the bottom line.
Average net margins: UK SMEs 5-10% | Healthy: above 10% | Strong: above 20%
EBITDA (Earnings Before Interest, Tax, Depreciation, Amortisation)
EBITDA = Operating Profit + Depreciation + Amortisation
= EBIT + D&A
If annual depreciation is £12,000:
EBITDA = £85,000 + £12,000 = £97,000
EBITDA is used because:
- Removes non-cash charges (depreciation/amortisation)
- Enables comparison across companies with different debt levels
- Used in business valuations (EBITDA multiple)
Common EBITDA valuation multiples:
Small business: 3-5x EBITDA
Mid-market: 6-10x EBITDA
Example: £97,000 EBITDA at 5x = £485,000 valuation