Operating Income

Definition

The financial accounting term operating income is a measure of a company's ability to earn money from ongoing operations.  Operating income appears as a line item on the income statement, and provides a measure of profitability before interest expense and income taxes are removed.

Calculation

Operating Income = Revenues - Operating Expenses

Where

  • Operating Expenses = COGS + SGA + Depreciation and Amortization + Other

Explanation

Operating income is a measure of profitable operations before interest expense, or income taxes, are paid.  Operating income is sometimes referred to as operating profit, earnings before interest and taxes, or EBIT.  Operating income removes from revenues the cost of goods sold; selling, general and administrative expenses; depreciation and amortization; as well as other operating expenses.

Unlike net income, operating profit excludes interest expense, which is a function of the amount of debt the company is using as part of its capital structure.  By excluding interest expense, analysts and investors are able to ignore the affect leverage has on the company's profitability.

Example

The table below illustrates how the calculation of operating income would appear on Company A's income statement:

Total Revenue  29,611,000
Cost of Goods Sold (15,693,000)
Gross Profit 13,918,000
   
Operating Expenses  
Selling General and Administrative (7,740,000)
Operating Income or Loss 6,178,000

Related Terms

income statement, COGS, SGA, depreciation, earnings before interest and taxes, leverage, discontinued operations