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 wages, depreciation, and cost of goods sold (COGS).
Operating income—also called income from operations—takes a company's gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses. A business's operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities.
- Operating income reports the amount of profit realized from a business's ongoing operations.
- Operating income is calculated by subtracting operating expenses from a company's gross income.
- Analyzing operating income is useful because it doesn't include one-off items such as taxes that may skew a company's profit in a given year.
Understanding Operating Income
Operating income is a measurement that shows how much of a company's revenue will eventually become profits. Operating income is similar to a company's earnings before interest and taxes (EBIT); it is also referred to as the operating profit or recurring profit. The one big difference between operating income and EBIT is that EBIT includes any non-operating income the company generates.
Analyzing operating income is helpful to investors because it doesn't include taxes and other one-off items that might skew profit or net income. A company that's generating an increasing amount of operating income is seen as favorable because it means that the company's management is generating more revenue while controlling expenses, production costs, and overhead.
How to Calculate Operating Income
The operating income formula is outlined below:
Operating Income=Gross Income−Operating Expenses
Operating expenses include selling, general, and administrative expense (SG&A), depreciation, and amortization, and other operating expenses. Operating income excludes items such as investments in other firms (non-operating income), 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 the operating margin, which describes a company's operating efficiency.
Operating income is the amount of income a company generates from its core operations, meaning it excludes any income and expenses not directly tied to the core business.
Operating Income Examples
Many companies focus on operating income when measuring the operational success of the business. For example, Company ABC, a hospital and drug firm, reports an operating income rise by 20% year-over-year to $25 million during the first two quarters of its fiscal year. The company realized an increase in revenue and operating income due to an increase in patient volume over the two quarters. The rise in patient visits was driven by two of the company's new immunotherapy drugs: One drug treats lung cancer and the other drug treats melanoma.
In another example, we have Company Red, which reports financial results for the first quarter of its fiscal year. The company saw operating income rise by 37%, when compared with 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 Company Blue, and shareholders are slated to vote on the potential merger next month. While Company Red's first-quarter sales did fall by 3%, its operating income growth could potentially give Company Blue shareholders confidence in voting to merge the two companies.
How to Find Operating Income
- Operating income for June 2019 was $11.5 billion (highlighted in blue). Note that the numbers are in millions of U.S. dollars.
- Operating income is calculated before, or located slightly above, net income.
- We can see that operating income is the result of gross income—or gross margin on Apple's income statement—of $20.2 billion minus operating expenses of $8.6 billion.
It's important to note that operating income is different than net income (as well as gross profit). Operating income includes more expense line items than gross profit, which primarily includes the costs of production. Operating income includes both COGS—or cost of sales—and operating expenses. However, operating income does not include items such as other income, non-operating income, and non-operating expenses. Instead, those figures are included in the net income calculation.
Is Operating Income the Same as Profits?
Not exactly. Operating income is what is left over after a company subtracts the cost of goods sold (COGS) and other operating expenses from the sales revenues it receives. However, it does not take into consideration taxes, interest or financing charges, or depreciation and amortization.
Can a Company Have a High Operating Income but Lose Money?
While a good operating income is often indicative of profitability, there may be cases when a company earns money from operations but must spend more on interest and taxes. This could be due to a one-time charge, poor financial decisions made by the company, or an increasing interest rate environment that impacts outstanding debts. Alternatively, a company may earn a great deal of interest income, which would not show up as operating income.
What Is Non-Operating Income?
In contrast to operating income, non-operating income is the portion of an organization's income that is derived from activities not related to its core business operations. It can include items such as dividend income, interest, gains or losses from investments, as well as those incurred in foreign exchange and asset write-downs.
Where Would I Find a Company's Operating Income?
Operating income is recorded on the income statement, and can be found toward the bottom of the statement as its own line item. It should appear next to non-operating income, helping investors to distinguish between the two and recognize which income came from what sources.