Dictionary / How companies make money
What Is Profit?
Profit is the money a company has left after it pays all its costs. It is the reward for running the business, and it is what makes a stock valuable in the long run.
How profit is calculated
Take the revenue, then subtract every cost. A bakery sells $10,000 of bread in a month. Flour, staff, rent and taxes cost $8,000. Its profit is $2,000.
Gross profit vs net profit
- Gross profit is revenue minus the direct cost of making the product, like flour for bread.
- Operating profit also takes out running costs like staff and rent.
- Net profit takes out everything, including interest on debt and taxes. It is the true bottom line.
Why profit matters for investors
Over time, a company is worth roughly what it can earn for its owners. Rising profit usually pulls the share price up. Profit per share is called EPS, and it is used in the P/E ratio.
Profit is not the same as cash
Accounting rules can make profit look different from the actual cash coming in. That is why investors also look at free cash flow, the real cash left over.
See it in real companies
Open a company to see what it sells and how it makes money.