What is 'Operating Revenue'
Operating revenue is revenue (sales) generated from a company's day-to-day business activities, which means revenue posted from selling the company’s products and services. A retailer, for example, produces revenue through inventory sales, and a doctor derives revenue from consulting with patients. Operating revenue is important for a business to remain viable, because these sales are sustainable from one year to the next.
BREAKING DOWN 'Operating Revenue'The income statement formula is revenue minus expenses equals net income (profit), and operating profit is computed as operating revenue minus operating expenses incurred. When performing financial statement analysis, managers separate operating results from non-operating results, since operating revenue is based on the primary business activities of a company.
Differences Between Operating and Non-Operating Revenue
Non-operating revenue is inconsistent and not planned as a part of annual business operations. Assume, for example, that a clothing manufacturer sells a warehouse building with an original cost of $10 million for a sale price of $15 million. In this transaction, $15 million is non-operating revenue and the profit of $5 million is non-operating income to the manufacturer.
The income statement lists operating revenue and profit from clothing sales first, then it posts non-operating revenue and profit for the building sale. This type of presentation informs the financial statement reader that the warehouse sale is unusual and not a part of the manufacturer's primary business. The transaction is unusual and may not happen again for years. Another example of non-operating revenue is the proceeds received from the settlement of a lawsuit.
Factoring in Cash Flow
Non-operating revenue and income do not produce cash inflows that are consistent from one year to the next, which is another reason why the activity is separately identified in the income statement. For a company to fund company operations, the business must generate operating revenue. Firms that drive operating revenue can fund the business each month without the need to seek additional financing, and these companies can operate with a lower cash balance.
How Operating Revenue Impacts Stock Prices
For a successful company, operating revenue and income are the primary source of earnings per share (EPS); this ratio is a key statistic for evaluating a firm's stock price. EPS is defined as earnings available to common shareholders divided by common shares outstanding. A well-managed business can grow operating revenue and income by finding more customers and moving into new markets, which generate higher earnings. As EPS increases, many investors and analysts consider the stock to be more valuable and the stock price increases.