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.

  1. Operating Profit

    Operating profit is the profit earned from a firm's normal core ...
  2. Income From Operations - IFO

    Income from operations is a company's earnings before interest, ...
  3. Operating Income

    The amount of profit realized from a business's operations after ...
  4. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  5. Operating Revenue

    Income derived from sources related to a company's everyday business ...
  6. Accounting Profit

    A company's total earnings, calculated according to Generally ...
Related Articles
  1. Taxes

    EBIT (Earnings Before Interest and Taxes)

    Earnings before interest and taxes, or EBIT, takes a company’s revenue, or earnings, and subtracts its cost of goods sold and operating expenses.
  2. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  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

    A Look At Corporate Profit Margins

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

    Apple's 5 Most Profitable Lines of Business (AAPL)

    Learn about how Apple generates its profits. It breaks its results by geographic region, with all showing year-over-year improvement.
  6. Investing

    IBM Stock: An Earnings Case Study

    Learn the main drivers behind IBM's earnings model and why analysts predict a decline in 2016 followed by a strong recovery in 2017.
  1. What is the difference between operating income and operating profit?

    Find out why operating margin and operating income can be treated synonymously with EBIT, but how they all differ from operating ... 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 does operating margin measure?

    Learn about why investors look to a company's operating margin, or return on sales, as a signal of both efficiency and profitability. Read Answer >>
  4. 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 >>
  5. What is the difference between gross profit margin and operating profit margin?

    Understand the difference between gross profit margin and operating profit margin, two measures of corporate profitability ... Read Answer >>
  6. What costs are not counted in gross profit margin?

    Explore the various measures of a company's profitability, such as gross, operating and net profit margins, and understand ... Read Answer >>
Hot Definitions
  1. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  2. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  3. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  4. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  5. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  6. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
Trading Center