What is Operating Income?
Definition
Operating income, also called operating profit or EBIT, measures the profit a company earns from its core business operations after deducting operating expenses. It excludes income and expenses from non-operating activities like interest, taxes, and one-time items.
Detailed Explanation
Operating income is calculated by subtracting all operating expenses from gross profit. Operating expenses include SG&A, R&D, depreciation and amortization, and other costs directly related to running the business.
Operating income is a better measure of core business performance than net income because it is not distorted by financing decisions or one-time events. Two companies with identical operations but different debt levels will have the same operating income but different net income.
Operating margin (operating income divided by revenue) is widely used for comparisons. A growing operating margin indicates improving efficiency.
Operating income is also the starting point for calculating EBITDA (by adding back depreciation and amortization) and is closely related to the EBIT metric used in many valuation frameworks.
Formula
Operating Income = Revenue - COGS - Operating Expenses
or
Operating Income = Gross Profit - Operating ExpensesExample
A company with $50B revenue, $20B COGS, $15B SG&A, $5B R&D, and $2B depreciation has operating income of $8B. Its operating margin is 16%.
Frequently Asked Questions
What is the difference between operating income and EBITDA?
Why is operating income preferred over net income for analysis?
Can a company have positive operating income but negative net income?
Related Terms
EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's operating profitability by stripping out financing decisions, tax effects, and non-cash accounting charges to focus on core business performance.
Gross Margin
Gross margin is the percentage of revenue remaining after subtracting the cost of goods sold (COGS). It measures how efficiently a company produces its products or delivers its services and is a key indicator of pricing power and production efficiency.
Net Income
Net income, also called the bottom line or net profit, is the total profit remaining after all expenses, taxes, interest, and costs have been deducted from revenue. It is the final line on the income statement and represents the profit available to common shareholders.
Operating Margin
Operating margin is the percentage of revenue that remains as operating profit after deducting all operating costs. It measures how efficiently a company converts revenue into profit from its core business operations, excluding the effects of financing and taxes.
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