Operating Earnings

What are 'Operating Earnings'

Operating earnings are profit earned after subtracting from revenues those expenses that are directly associated with operating the business, such as the cost of goods sold, general and administration, selling and marketing, research and development, depreciation and other 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.

Operating earnings is interchangeable with operating income, operating profit and earnings before interest expense and taxes (EBIT).

BREAKING DOWN 'Operating Earnings'

Operating earnings lie at the heart of internal and external analysis of a company's profitability. The individual components of operating costs can be measured relative to total operating costs or total revenues to assist management in running a company. Many variants of metrics stemming from operating earnings can also be used to compare a given company's profitability with those of its industry peers.

Example of Operating Earnings

If Gadget Co. had $10 million in revenues in a given quarter and $7.5 million in operating expenses during that period, its operating earnings would be $2.5 million. Net income would then be derived by subtracting interest expenses and taxes, and netting out extraordinary gains and losses, 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.

Sometimes a company presents a non-GAAP "adjusted" operating earnings figure to account for 'one-offs' that management believes are not part of recurring operating expenses. A prime example is restructuring costs. Management may add back these costs to report higher operating earnings on an adjusted basis. However, critics could point out that restructuring costs are not 'one-offs' if they occur with some regularity.