Greeting from Singapore. I have recently embarked on my CFA journey and is currently reading Book 3- Financial Reporting and Analysis (Schweser Notes hereafter " SN"). I will like to seek your advices/help on the following questions which I have chanced upon during my course of study.
Operating Profit for financial and non-financial company
I understand from SN that operating profit generally mean earning before interest and tax (hereafter " EBIT"). So basically we will find operating profit from the income statement:
Sales
Less COGS
Gross Profit
Less Operating Expenses
Operating Profit
Less Interest
Profit before tax
Less Taxation
Net Profit
Above is a simple depiction of a general income statement ( I do understand that different companies have different way of presentation, subjected to the underlying governing accounting standards.
I understand from previous reading that depending on the nature of the firm ( i.e. financial vs non-fiancial firms); the treatment of interest will differ according. Generally for financial firm, interest will be part of operating expenses whereas similar item will be classified as non-operating expenses (for non-fiancial firms)
Question : Since Operating Profit generally refers to EBIT; given a hypothetical exam question that present an income statement of a finanical firm and computation of Operating Profit Margin (hereafter " OPM") is required. What should we do?In my opinion, I will add back the interest expense back to the operating profit and thereafter compute the OPM. My reason for doing so is simple: Since interest expense has been accounted for under operating expenses to arrive at operating profit; I need to add back the interest expense to arrive at EBIT to compute OPM. Am I right to do so?
What you should do depends on what information they give you. They may give you net income, interest, and taxes; then you’d have to add taxes and interest to net income to get EBIT. Or they may give you EBT, taxes, and interest; you’d have to add interest (but not taxes) to EBT to get EBIT. And so on.
