What is 'Operating Income'
Operating income is an accounting figure that measures the amount of profit realized from a business's operations, after deducting operating expenses such as cost of goods sold (COGS), wages and depreciation. Operating income takes a company's gross income, which is equivalent to revenue minus COGS, and subtracts all operating expenses and depreciation. A business's operating expenses are costs incurred from operating activities and include items such as office supplies, heat and electricity.
BREAKING DOWN 'Operating Income'Operating income is a measurement that shows how much of a company's revenue will eventually become profit. Operating Income is a synonym for earnings before interest and taxes (EBIT) and is also referred to as "operating profit" or "recurring profit."
Operating income is calculated as: Operating income = gross income - operating expenses - depreciation - amortization
The measure of operating income excludes items such as investments in other firms, taxes and interest expenses. In addition, nonrecurring items such as cash paid for a lawsuit settlement are not included. Operating income is required to calculate operating margin, which describes a company's operating efficiency. For more information on the use of operating income in margin calculations, check out Analyzing Operating Margins
Examples of Operating Income
Many companies focus on operating income when measuring the operational success of the business. For example, Boston-based Dana-Farber Cancer Institute reported on June 15, 2016, that the organization saw its operating income increase by 20% year over year to $27.3 million in the first two quarters of its fiscal year. The company realized increased revenue and operating income by extension due to an increase in patient volume over the two quarters, ending March 31, 2016. The rise in patient visits was driven by two of the company's new immunotherapy drugs. One treats lung and renal cell cancer and the other treats melanoma.
Denali Holding, Inc., the parent company of Dell Technologies, reported its financial results for the first quarter of its fiscal year, ending April 29, 2016. The company saw operating income rise by 37% when compared to the same period in the previous year. The report of the increase in operating income is especially important because the company is looking to merge with EMC, and shareholders are slated to vote on the potential merger on July 19, 2016. While Denali Holding, Inc.'s first quarter sales dropped by 3%, its operating performance could potentially give EMC shareholders confidence in voting to merge the two companies.