Operating Income

Two ways an income statement reaches operating profit

IFRS lets companies present their operating expenses in one of two ways, and Nordic companies use both:

• By nature. Materials and services, employee benefits, depreciation and other operating expenses are shown as separate lines. This is common in Finland, for example at KONE and Elisa. There is no gross profit line in this format.
• By function. Cost of sales comes first, then research and development, selling, and administrative expenses. This is common in Sweden and in technology companies, for example at Ericsson and Nokia. This format shows gross profit.

Both formats arrive at the same operating profit. The difference matters when you compare margins above operating profit: a gross margin can only be calculated for companies that report by function.

Until now, IFRS has not defined operating profit at all, so companies draw the line in slightly different places. Some include their share of the results of associated companies in operating profit and others show it below. IFRS 18, which applies to financial years beginning on or after 1 January 2027, makes operating profit a required subtotal with a common definition for the first time, which will make companies easier to compare.

How to read operating profit

• Use the operating margin (operating profit ÷ revenue) to compare companies of different size and to see whether growth is profitable. The operating margin calculator can be filled with the figures of any company we track.
• Compare with the same quarter a year earlier. Many Nordic businesses are seasonal. Construction-related and consumer businesses often have their strongest quarters in summer or before Christmas, so comparing the second quarter with the first can mislead.
• Find what drove the change. Higher volumes, better prices, lower costs and currency rates all move operating profit; the management review in the report usually breaks the change down.
• Check the items affecting comparability. Restructuring costs, impairments and gains on selling a business all sit inside reported operating profit. That is why most companies also report an adjusted or comparable figure, and the two can differ a lot in a single quarter.

What operating profit does not tell you

• Financing costs are real. A company with heavy debt can have a healthy operating profit and still a weak net income after interest.
• It is an accounting profit, not cash. Revenue recognised before the customer pays, and investment spending that is depreciated over many years, make operating profit differ from cash flow from operations, sometimes for years.
• The capital behind it is invisible. Two companies with the same operating profit can need very different amounts of capital to earn it. Return on capital employed and return on invested capital show how well that capital is used.
• One quarter is noisy. Look at the trend over several quarters, or at the last twelve months, before drawing conclusions.

Operating profit is the best single line for judging how the business itself is doing. Before drawing conclusions about value, read it together with cash flow from operations, the balance sheet and the adjusted figure, and compare it with the company’s own financial targets.