What is Operating Revenue?
Operating revenue is revenue generated from a company's primary business activities. For example, a retailer produces revenue through merchandise sales, and a physician derives revenue from the medical services he/she provides. What constitutes operating revenue varies per business or industry.
- Operating revenue is generated by a company's primary business activities.
- It can be compared year over year to assess the health of a company and its operations.
- Operating revenue should be separated out from non-operating revenue that occurs from infrequent, unusual, or one-time events.
Understanding Operating Revenue
Distinguishing operating revenue from total revenue is important as it provides valuable information about the productivity and profitability of a company's primary business operations. Despite recording operating revenue separately on financial statements, some firms may attempt to mask decreases in operating revenue by combining it with non-operating revenue. Understanding and identifying the sources of revenue is helpful in assessing the health of a firm and its operations.
Operating Revenue vs. Non-Operating Revenue
Non-operating revenue is revenue generated by activities outside of a company's primary operations. This type of revenue tends to be infrequent and oftentimes unusual. Examples of non-operating income include interest income, gains from the sale of assets, lawsuit proceeds, and revenues from other sources not connected to operations.
For example, a private university may classify tuition received as operating revenue, whereas gifts from alumni are considered non-operating revenue as they are not expected nor are they part of ordinary university operations. In this example, the university's income statement lists operating revenue and profit from operations first, then it posts non-operating revenue and profit, such as revenue received from gifts and legacy donations. This presentation of information informs those reviewing the company's financial records that the gift is not an ordinary part of the university's business. It is important to distinguish the difference because non-operating revenue can change drastically from year to year.
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 regularly without the need to seek additional financing, and these companies can operate with a lower cash balance.
For example, a company may sell a fixed asset, such as a building, in the current year. If the building is sold at a gain, the gain will be treated as non-operating revenue in the year it was sold. This revenue is not expected as a normal course of doing business, and the one-time revenue should not be used to assess the success of the company's primary operations year over year.
How Operating Revenue Impacts Stock Prices
For a successful company, operating revenue and income are the primary sources 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 that generate higher earnings. As EPS increases, many investors and analysts consider the stock to be more valuable and the stock price increases.