Gross profit is essentially the profit made from a company before interest expenses, taxes, and dividend expenses. This is the gross sum of money made in a calendar year as income.
Gross profit can be defined also, commonly, as EBIT and NOPAT. Earnings before interest and taxes (EBIT) is commonly calculated as gross profit. This is a measure that is used for year by year comparisons to analyze the company's earnings performance based on a different capital structure and different tax rates. Net operating profit after taxes (NOPAT) is the same thing as (EBIT) except that it takes taxes out to make the net profit without regard to interest expense.
For example, a company may have net income of 100 million dollars and interest expense of 1 million dollars and taxes of 5 million. The earning before interest and taxes (EBIT) would be 106 million dollars. The net operating profits after tax (NOPAT) would be 101 million dollars. This is calculated by disregarding interest expense leaving roughly 5 million in taxes subtracted from gross profit of 106 million, leaving the difference of 101 million dollars.
A company's gross earnings is an important financial metric used to gauge the strength of the company. Many investors turn to gross earnings to see exactly how much money is being made by a company over a specific period. In order to calculate gross earnings, an individual can look at an income statement that is released by the company. By taking the total sales of the company and subtracting the cost of goods sold from that number, the gross earnings can be determined.
While this number is important, it should not be the only thing that an individual looks at when evaluating a company. This number does not take into consideration several other things that can be critical to a company's success. For example, this number does not factor in debt or the cost of the debt. Financial analysts know the importance of both equity and debt financing for the success of a company, and if you do not take this into consideration, you could make a bad judgment when choosing a company to invest in.
Companies strive to increase their gross earnings because they are a measure of profitability since the cost of the goods sold is taken out.