Which profit measure is best for assessing how well a firm operates within their industry?

Question

BlackTom AI · Accepted Answer

The question asks which profit measure best captures how well a firm operates within its industry, emphasizing operating efficiency and core operations.
Option 1: 'Operating profit' — This is the most suitable choice here. Operating profit reflects earnings from the firm’s primary business activities after subtracting operating expenses (like cost of goods sold and selling, general, and administrative costs) but before interest and taxes. It directly indicates how efficiently the firm converts its sales into profits from ongoing operations, which is central to assessing operating performance within an industry.
Option 2: 'Earnings before tax' — While EBT shows profitability before tax, it includes interest income/expense and may be affected by financing choices rather than core operations. Therefore, it can obscure how well the core business runs. It is not as clean a measure of operating performance as operating profit.
Option 3: 'Gross profit' — Gross profit equals sales minus cost of goods sold, ignoring all other operating expenses. While useful for evaluating production efficiency and pricing, it does not account for other operating costs that affect overall operating performance, so it’s incomplete for judging operating efficiency within an industry.
Option 4: 'Net income after tax' — Net income after tax includes all revenues, expenses, financing costs, and taxes. It reflects overall profitability but is heavily influenced by financing structure and tax circumstances, not specifically the efficiency of operations. This makes it the least aligned with assessing operating performance within the industry.
In summary, operating profit isolates the core operating performance by accounting for operating revenues and expenses, making it the best measure for evaluating how well a firm operates in its industry.

COMM_V 320 DD4 2025W1 Part A Final Exam December 15, 2025 Part A Multiple Choice - 30 minutes

Which profit measure is best for assessing how well a firm operates within their industry?

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