Operating Income

Written By

Dan Buckley

Updated

Oct 20, 2023

What Is Operating Income?

Operating income is a measure of a company’s profitability from its core business activities. It is calculated as revenue from operations minus operating expenses.

Operating income is also sometimes referred to as “operating profit” or “EBIT“.

Operating income is a key metric for assessing a company’s financial performance, since it provides insight into how much profit a company generates from its day-to-day operations. A company with a high operating income is typically more profitable than a company with a low operating income, though it will depend on interest and tax expenses (as operating income doesn’t subtract those out).

Investors and analysts often compare a company’s operating income to its net income (profit) to get a better sense of how efficient the company is at generating profit from its core operations.

If a company has a high operating income but a low net income, it may be losing money on other activities such as interest payments or taxes.

How to Calculate Operating Income

Operating income is calculated as revenue from operations minus operating expenses.

Revenue from operations is typically reported on a company’s income statement as “sales” or “revenue”.

Operating expenses include things like cost of goods sold (COGS), selling, general and administrative (SG&A) expenses, and depreciation and amortization expense.

For example, let’s say Company XYZ reports sales of $100 million and operating expenses of $80 million. Company XYZ’s operating income would be $100 million – $80 million, or $20 million.

It’s important to note that operating income does not include non-operating items such as interest expense, taxes, or one-time gains or losses.

These items are considered to be outside of a company’s normal business activities and are therefore excluded from the operating income calculation.

Operating Income Definition

Operating Income vs. Net Income

Operating income and net income are two of the most important profitability metrics used by investors and analysts.

Here’s a quick overview of the key differences between the two:

Operating income is a measure of a company’s profitability from its core business activities. It is calculated as revenue from operations minus operating expenses.

Net income is a measure of a company’s overall profitability. It is calculated as revenue from all sources minus all expenses. This includes both operating expenses and non-operating expenses such as interest payments and taxes.

Because operating income only takes into account a company’s core business activities, it is often seen as a more accurate measure of profitability than net income.

However, net income is still an important metric to consider, since it provides a more comprehensive view of a company’s overall financial performance.

Net income is also known as profits or earnings and is a key consideration for investors, as net income represents a company’s so-called bottom line. At the end of the day, how much money is it actually making?

Operating income, however, may be more useful when it comes to understanding a firm’s operating health and company-to-company comparisons (given it doesn’t take into consideration capital structure (by excluding interest costs) and jurisdiction (by excluding taxes)).

Operating Income vs. EBIT

Operating income and EBIT (earnings before interest and taxes) are two closely related profitability metrics.

Both measures give investors and analysts insight into a company’s ability to generate profit from its core business activities.

The key difference between operating income and EBIT is that EBIT may consider non-operating income and non-operating expenses. This includes things like one-time items.

For instance, if a company sells a factory, this may appear in EBIT but may not be considered in operating income because the factory sale doesn’t have to do with a company’s core operations.

In fact, it may be a sign that the company’s future earning potential is lower, but will depend on how the funds from the sale are deployed.

EBIT is often seen as a more accurate measure of a company’s profitability than operating income. However, operating income will focus on a company’s operations, which may provide a more accurate view of a company’s overall financial performance.

Operating Income vs. EBITDA

Operating income and EBITDA (earnings before interest, taxes, depreciation, and amortization) are two closely related profitability metrics.

Both measures give investors and analysts insight into a company’s ability to generate profit from its core business activities.

The key difference between operating income and EBITDA is that EBITDA excludes items such as interest payments, taxes, depreciation, and amortization from its calculation while operating income will subtract out interest and taxes.

This means that EBITDA only includes revenue and expenses from operations.

EBITDA is often a more popular measure of a company’s operating profitability than operating income.

However, operating income is something closer to the actual earnings of the business, as depreciation and amortization are real expenses that impact the quality of a business.

Operating Income vs. Revenue

The main difference between operating income and revenue is that revenue includes all money earned by a company from its business activities, while operating income only includes money earned from core business activities after operating expenses have been deducted.

This means that revenue doesn’t subtract out items such as depreciation and amortization, while operating income does.

Revenue is often used to assess earlier stage companies. This is because revenue denotes how much a market a startup might capture.

Many times startups try to get whatever amount of the market they can because focusing on becoming more lean and efficient, where metrics like operating income and actual earnings become more important.

Operating Income vs. Gross Profit

The difference between operating income and gross profit is that gross profit only includes revenue from a company’s core business activities after the cost of goods sold (COGS) has been deducted, while operating income includes all revenue and expenses from a company’s core business activities.

Gross profit is more of a focus for understanding the unit economics of a company.

For example, if you want to understand how efficient a carmaker is, you might want to consider gross profit or gross margin. If a company has a 30 percent gross margin on the car it sells, that means the unit economics work. If the company has sufficient scale, that means it could likely be profitable.

Gross Profit vs Operating Income

Operating Income Before Depreciation and Amortization (OIBDA)

Operating income before depreciation and amortization (OIBDA) is a measure of a company’s operating profitability that excludes items such as depreciation and amortization from its calculation.

Depreciation and amortization are non-cash expenses that are often used to account for the wear and tear of a company’s assets over time.

After Tax Operating Income (ATOI)

After tax operating income (ATOI) is a measure of a company’s operating profitability that includes the effects of taxes.

ATOI is often seen as a more accurate measure of a company’s operating profitability than operating income, since it provides a more complete picture of a company’s financial performance.

Operating income per share (OIPS) is a measure of a company’s operating profitability that takes into account the number of shares outstanding.

This may help traders and investors assess how much operating income they’re getting relative to the price they’re paying.

For example, if a company has $3 in OIPS and the stock is trading at $30 per share, that’s a 10x multiple. They can then assess if that’s a good enough deal.

Operating Income Margin (OIM)

Operating income margin is a financial ratio that measures a company’s operating income as a percentage of its revenue.

The operating income margin is a good way to measure a company’s profitability because it shows how much profit the company generates from its operations after taking into account all of its operating expenses.

A company with a high OIM is more profitable than a company with a low OIM, and is therefore more likely to be able to generate higher returns for shareholders.

Operating Income Margin = Operating Income / Revenue

Operating income margin example

For example, if Company A has an operating income of $100 million and revenue of $1 billion, then its operating income margin would be 10 percent.

Company B has an operating income of $50 million and revenue of $500 million, then its operating income margin would also be 10 percent.

Why is operating income margin important?

Operating income margin is a good way to measure a company’s profitability because it shows how much profit the company generates from its operations after taking into account all of its operating expenses.

A company with a high OIM is often more profitable overall than a company with a low OIM, and is therefore more likely to be able to generate higher returns for shareholders.

What are some factors that can impact a company’s operating income margin?

There are many factors that can impact a company’s operating income margin, including:

the mix of products and services that it offers
the pricing of those products and services
the efficiency of its operations, and
the overall economic conditions

What is a good operating income margin?

There is no one-size-fits-all answer to this question, as the operating income margin that is considered “good” will vary depending on the industry in which a company operates.

For example, companies in highly competitive industries often have lower margins than companies in less competitive industries. As a general rule, however, a company with an OIM of 10 percent or higher is usually considered to be doing well.

Operating Income Growth (OIG)

Operating income growth is a financial metric that measures the rate of growth in a company’s operating income.

It is calculated by taking the current period’s operating income and dividing it by the operating income of the same period in the previous year.

Operating income growth is an important metric for investors to track because it provides insight into a company’s profitability and overall financial health.

A company with strong operating income growth is typically generate higher profits and have a healthier balance sheet.

There are a few things to keep in mind when interpreting operating income growth.

First, it is important to compare a company’s OIG to its peers in order to get a better understanding of how it is performing.

Second, one-time items can inflate or deflate reported OIG, so it is important to adjust for these items when necessary.

Finally, OIG can be affected by changes in accounting methods, so it is important to be aware of these changes when analyzing the data.

Operating Income – FAQs

What Is Operating Income Used For?

Operating income is used by investors and analysts to assess a company’s ability to generate profit from its core business activities.

How Is Operating Income Calculated?

Operating income is calculated by subtracting a company’s operating expenses from its operating revenues.

What Are the Limitations of Using Operating Income?

The main limitation of using operating income is that it does not include non-operating items such as interest expense and taxes.

As such, operating income may not provide a complete picture of a company’s overall financial performance.

It also excludes items such as interest and taxes, which can be significant expenses for some companies.

So, a good operating income does not mean a good net income if interest and tax expenses swamp the amount of operating income.

What Is a Good Operating Income?

There is no definitive answer to this question, as the operating income of a company will vary depending on its industry and business model.

However, a higher operating income is generally seen as being better than a lower operating income.

Is Operating Income Better Than Net Income?

It depends on what you’re trying to measure.

The main difference between operating income and net income is that net income includes all income and expenses, while operating income only includes items that are directly related to a company’s core business activities.

As such, operating income provides a more accurate picture of a company’s profitability from its core business activities.

Summary – Operating Income

Operating income is a measure of a company’s operating profitability that shows how much profit a company generates from its core business activities.