The Difference Between Economic and Underlying Profit

profit

There are two basic types of profit: economic and underlying. Economic profit is more theoretical and used for tax purposes, while underlying profit is more realistic and used in business decisions. Accounting profit is generally used by companies, but many supplement it with a subjective take on their profit position. Underlying profit, for example, excludes one-time charges and infrequent occurrences that can affect the bottom line. It’s the most widely used type of profit metric.

Both are important, but they mean slightly different things. Profit is the amount a company makes after expenses are subtracted from revenue. The latter is the more important of the two. While accounting profit is the more useful, more complex metric, it still remains important to know when analyzing a business’s financial performance. It’s a good idea to have a general understanding of both. The following will help you determine which one is more important for your business.