Pre-tax profit is one of the indicators for evaluating a business, recorded in the periodic financial statements of each business.
Pre-tax profit is also known as accounting profit before tax or pre-tax income. This is an indicator on the business results report of the enterprise. This indicator shows the profit the enterprise generated in the previous period, after deducting the cost of corporate income tax.
If pre-tax profit is greater than 0, then the revenue generated has offset the costs and the business is profitable. On the contrary, if pre-tax profit is less than 0, then the revenue generated is not enough to offset the costs incurred during the period, and the business is making a loss.
Pre-tax profit includes profits from production and business activities, financial profits and other profits.
Formula for calculating profit before tax
Profit before tax is calculated by subtracting total expenses from total revenue. The formula is as follows:
Profit before tax = Total revenue - total fixed costs - total incidental costs
In which, total revenue is all revenue from production and business activities shown through sales receipts and sales invoices.
Fixed costs include capital expenditure, production costs, transportation costs, employee costs, location rental costs and other fixed costs in business.
Incurred costs are all costs incurred during the unplanned operations of the business.
The importance of pre-tax profit
Profit before tax plays an important role in the management of business models of administrators. Accordingly, profit before tax is an indicator to evaluate the production and business situation. Therefore, profit before tax is an indicator to help businesses reduce risks and limit unnecessary occurrences.
Pre-tax profit is also a real profit of the enterprise after deducting expenses and interest. It is the result of the enterprise's operations, so investors can rely on it to decide whether to invest or not.
Pre-tax profit also provides important information for analysts and investors to evaluate credit growth most accurately, thereby limiting errors.
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