Operating Income Definition & Meaning Formula Examples

Operating income is the profit a company is left with after paying for all expenses related to core business operations. It’s a simple way to measure performance year-over-year or to compare one business to another. They are similar, but EBIT includes any non-operating income as well as expenses from non-core business functions, such as investments in other companies.

  • When in doubt, please consult your lawyer tax, or compliance professional for counsel.
  • 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.
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  • Both measurements calculate the amount of money a company earned less a few noncontrollable costs.
  • Gross profit is the net profit earned after the cost of goods sold is subtracted from net revenue.

Operating income indicates how profitable a company will be after it has deducted operational expenses and cost of goods sold (COGS). This measurement doesn’t include non-operating expenses like inventory costs or interest, and it also excludes taxes. A higher operating income usually means a company will be more profitable, while a lower operating income indicates less profitability. Operating expenses include selling, general, and administrative expenses (SG&A), depreciation, and amortization. Operating income does not include money earned from investments in other companies or nonoperating income, taxes, and interest expenses. Also excluded are any special or nonrecurring items, such as acquisition expenses, proceeds from the sale of a property, or cash paid for a lawsuit settlement.

Major Components of Operating Income

When gross profit, operating income, and net income are listed as a percentage of revenue, they are termed gross margin, operating margin, and profit margin, respectively. These would be capital structure expenses like interest, taxes, and other expenses or sources of income such as investments not related to the core business. Operating income is calculated by deducting the ongoing costs of running the business from the revenue generated during that period.

On the other hand, gross profit is the monetary result obtained after deducting the cost of goods sold and sales returns/allowances from total sales revenue. 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.

It is an indirect measure of productivity and a company’s ability to generate more earnings, which can then be used to further expand the business. Investors closely monitor operating profit in order to assess the trend of a company’s efficiency over a period of time. In addition to rental income, a property might also generate revenue from amenities such as parking structures, vending machines, and laundry facilities.

  • In short, net income is the profit after all expenses have been deducted from revenues.
  • In the final step, we’ll subtract Apple’s total operating expenses – R&D and SG&A – from its gross profit.
  • In this formula, you must have a fully calculated income statement as net income is the bottom and last component of the financial statements.
  • Operating income is positioned as a subtotal on a multi-step income statement after all general and administrative expenses, and before interest income and interest expense.
  • It’s a measurement of what money a company makes only looking at the strictly operational aspect of its company.

Finally, subtracting $164,000 from $460,000 gives you an operating income of $296,000. Operating income refers to the adjusted revenue of a company after all expenses of operation and depreciation are subtracted. Expenses of operation or operating expenses are simply the costs incurred in order to keep the business running. These may include rent, utilities, wages paid to employees, COGS, inventory and equipment costs – anything necessary to normal business operation.

Net Operating Income vs. Gross Operating Income

Companies must factor in a number of expenses to run a business, and sometimes these costs exceed revenues, resulting in lower operating income and profit. When a company has healthy revenues and operating income, this results in stronger operating margins. However, what is considered a strong operating margin often varies across different industries. Net operating income is a valuation method used by real estate professionals to determine the precise value of their income-producing properties. To calculate NOI, the property’s operating expenses must be subtracted from the income a property produces.

Who Deals With Operating Income?

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Operating margin

In this case, the company may already be reporting operating income towards the bottom of the report. However, the two numbers are different ways of expressing a company’s earnings, and they have different deductions and credits involved in their calculations. The main difference is that revenue is a company’s income before deducting expenses, while operating income represents the profit after subtracting expenses. In real estate, this represents the total potential income from a property, minus any lost income due to vacancies. The net operating income is the gross operating income, minus operating expenses.

Key Takeaways

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What Is Revenue?

Direct costs are expenses specifically related to the cost of producing goods and services—things like parts, raw materials, utility bills, direct labor, and commissions or professional fees. Indirect costs are expenses that aren’t directly related to manufacturing or buying goods for resale. Examples include salaries and benefits, factory equipment (depreciation and maintenance), rent, and certain utilities. Revenue or net sales refer only to business-related income (the equivalent of earned income for an individual).