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Operating income

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What is Operating income?

Operating income, also known as operating profit or EBIT (Earnings Before Interest and Taxes), is a financial metric that measures the profit a company generates from its core business operations after deducting operating expenses such as wages, depreciation, and the cost of goods sold (COGS). It excludes non-operating items like interest, taxes, and one-time events, offering a clear view of operational efficiency.

Key takeaways

1
Core profitability measure

Operating income reflects how much profit is earned from normal business activities, excluding the effects of financing and non-recurring items.

2
Calculation
  • Operating Income = Gross Profit – Operating Expenses (including depreciation and amortization)
  • Or: Operating Income = Net Revenue – COGS – Operating Expenses (SG&A, R&D).

3
Operational focus

It highlights a company’s ability to generate profit from its main activities, independent of capital structure and tax environment.

4
Comparable metric

Operating income is widely used for comparing operational performance across companies and industries, as it standardizes profitability before interest and taxes.

Why operating income matters?

Operating income serves as a key indicator of business health by reflecting how efficiently a company manages its core operations, with consistent or growing figures signaling strong management. Unlike net income, operating income excludes non-operational factors such as interest, taxes, and one-time events, offering a clearer view of ongoing profitability. Additionally, it forms the basis for calculating the operating margin, an important ratio for benchmarking profitability relative to sales.

The operating income calculation process

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1
Calculate gross profit

Gross Profit = Net Revenue – Cost of Goods Sold (COGS).

2
Determine total operating expenses

Include selling, general, and administrative (SG&A) expenses, R&D, and depreciation/amortization.

3
Subtract operating expenses from gross profit

Operating Income = Gross Profit – Operating Expenses.

Impact on business and investment decisions

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Operational efficiency: Reveals how well a company controls its core costs

Profitability: Indicates profit from main business activities

Benchmarking: Enables comparison across companies and industries

Strategic planning: Informs decisions on pricing, cost control, and expansion

Impact on financial statements

Real-world examples

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Case study: Consulting firm’s operating income

A consulting company’s revenue grew 29% to $461,697 in 2020. However, operating expenses rose nearly 37% to $451,205 due to investments in new services. As a result, operating income dropped to $10,492, and the operating profit margin fell from 7.7% to 2.3%. This highlights how rising costs can erode operational profitability, even when sales increase.

Frequently asked questions about operating income?

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Operating income excludes interest, taxes, and non-operational items, while net income includes them.
Yes. Negative operating income indicates that operating expenses exceed gross profit, signaling potential operational issues.
By increasing revenue, reducing operating costs, improving productivity, or optimizing pricing strategies.