Operating Earnings


DEFINITION of 'Operating Earnings'

Profit earned after subtracting from revenues those expenses that are directly associated with operating the business, such as cost of goods sold, administration and marketing, depreciation and other general operating costs. Operating earnings are an important measure of profitability, and since this metric excludes non-operating expenses such as interest and taxes, it enables an assessment of the company's core business profitability to be made.

Also known as operating income.

BREAKING DOWN 'Operating Earnings'

Operating earnings differs from another widely used measure of profitability, EBIT or earnings before interest and taxes, in that it excludes non-operating income, whereas EBIT includes non-operating income.

For example, if Widget Co. had $10,000,000 in revenues in a given quarter and $7,500,000 in operating expenses during that period, its operating earnings would be $2,500,000. Net income would then be derived by subtracting interest expenses and taxes from the operating earnings. The operating margin, or operating earnings as a percentage of revenues, which is 25% in this example, is closely tracked by management and investors from one quarter to the next for an indication of the trend in profitability.

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