A:

Operating income and operating profit are synonyms for the income produced by operations in a business. This income is the net of revenues minus operating expenses, cost of goods sold and depreciation reported on a company's income statement. Operating income/profit is an important number for investors to review on the income statement, as it shows how efficiently the company generates a profit.

Net income, calculated later in the income statement, incorporates taxes and other factors the company has little control over, while its operation expenses can be manipulated in ways to increase profit margins. Investors view this part of the income statement as the most important, because it can be directly compared with operating profit from competitors. For example, if Company A, a candle maker, records an operating profit of $3 million for the year, while Company B, also a candle maker, records an operating profit of only $1.5 million, an investor can make a decision as to which company makes the most from candle sales. If the investor expects candle sales to rise, he or she has a better chance for higher profit investing in Company A.

Many analysts emphasize the importance of operating profit over net profit, simply because it shows the core of the business and how well it can perform. Net profit can be influenced by many different variables from year to year, but if operating profit steadily increases, an investor knows the business is on the right track. Operating profit numbers are also key for determining how a change in the market for a business' main resources affect its production numbers.

RELATED FAQS
  1. What does operating profit margin tell a business owner?

    Learn about the operating profit margin, how it is calculated and what it says to both business owners and investors about ... Read Answer >>
  2. Why does operating profit exclude interest revenues and expenses?

    Understand the purpose of examining a company's operating profit margin and why interest revenues and expenses are not included ... Read Answer >>
  3. What is the difference between gross profit, operating profit and net income?

    Learn about the relationship between gross profit, operating profit and net income and how these financial concepts are calculated. Read Answer >>
  4. What is the difference between operating income and revenue?

    Understand the definitions of revenue and operating income, how they are calculated and interpreted, and how operating income ... Read Answer >>
  5. How do operating expenses affect profit?

    Explore how operating expenses and the cost of goods sold can either increase or decrease a company's profits on an income ... Read Answer >>
Related Articles
  1. Investing

    Understanding Profit Metrics: Gross, Operating and Net Profits

    Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
  2. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  3. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  4. Investing

    Profit Metrics: Gross, Operating & Net Profits

    In addition to net profit, most analysts look at a company’s gross profit and operating profit to gauge performance.
  5. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  6. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  7. Investing

    What is Operating Revenue?

    Operating revenue is income that’s derived from sources related to a company’s everyday business operations.
  8. Financial Advisor

    Using Candles To Understand Market Behavior

    The conventional interpretation of candle charts focuses on the many different candle formations, but Dan Gramza shows how he uses candle charts to identify market behavior. This includes how ...
  9. Investing

    Calculating Operating Ratio

    An operating ratio compares a company’s operating expenses to its net sales.
RELATED TERMS
  1. Operating Profit

    The profit earned from a firm's normal core business operations. ...
  2. Operating Income

    The amount of profit realized from a business's operations after ...
  3. Corporate Profit

    A statistic reported quarterly by the Bureau of Economic Analysis ...
  4. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  5. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  6. Three Inside Up/Down

    The three inside up and three inside down are three-candle reversal ...
Hot Definitions
  1. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  2. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  3. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  4. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
  5. Socially Responsible Investment - SRI

    Socially responsible investing looks for investments that are considered socially conscious because of the nature of the ...
  6. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
Trading Center