What is Operating Income? Operating Income Formula and EBITDA vs Operating Income

Calculating operating income is one of the best ways to assess a company’s profitability and operational efficiency and a metric that investors will want to see. EBITDA margin is also a more accurate measure of profitability than gross margin. Gross margin measures a company’s profitability before deducting the cost of goods sold.

If a company’s net sales are $1 billion, but its operating income is just $10 million, it only keeps 1% of each transaction for other uses, spending 99% on making those sales. Businesses that retain more from each sale usually need to make fewer sales to keep operating. While there are other ways to calculate operating income, let’s get some definitions down first to make them more understandable. To get an idea of what this looks like, here’s an example of Google’s income statement over the past few years, including operating income. Depreciation is calculated by subtracting the asset’s resale value from its original cost — and this is expensed over the course of the asset’s expected life.

Operating Income Template

If a company consistently reports an operating profit, it’s more likely to be able to flourish over the long term without requiring outside funding. If a company succeeds in increasing its operating income over time, it typically indicates an ability to increase revenue while holding down operating costs. Operating income measures how much of your business’s profit comes from business operations. Operating income (OI) is a measure of a company’s financial performance that excludes interest and income tax expenses. It is calculated by subtracting these expenses from a company’s revenue.

Operating income is also calculated by subtracting operating expenses from gross profit. Operating income and EBITDA are two different ways of measuring a company’s profitability. Operating income is calculated by subtracting the cost of goods sold and the operating expenses from the company’s revenue. This makes it a more accurate measure of a company’s ability to generate cash flow. The amount of profit a business makes after considering all expenses from operating the business is known as operating income.

What is net operating income?

Nonoperating revenue and costs should be excluded from the calculation. The bottom line is also referred to as net income on the income statement. 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. It’s important to note that operating income is different than net income.

You can focus more on metrics that drive growth, such as net recurring revenue (NRR). SaaS companies with an NRR of 110% or more are more likely to hit and exceed the Rule of 40 growth benchmark than those with lower retention. Operating income and net operating income are two terms that are often used interchangeably, but there are slight differences between the pair.

What is the difference between operating income and operating profit?

When you go to work every day, you usually expect to make money from showing up. Your employer agrees to pay you a set wage each day, and you agree to work. You pay some costs, such as transportation to get to work and food to eat during lunch.

But like any other financial metric, it’s only as valuable as the context you put around it. Net income appears at the bottom of the income statement and refers to the amount after all expenses are deducted from revenue. To calculate this on an income statement, you’ll need to report all revenue from sales and all expenses, including interest and taxes.

Understanding operating income

Notice the increase in Apple’s reported operating income for 2022 compared to 2021. In short, net income is the profit after all expenses have been deducted from revenues. Expenses can include interest on loans, general and administrative costs, income taxes, and operating expenses such as rent, utilities, and payroll. It subtracts operating expenses – such as rent, payroll, and property taxes – from your gross operating income, which is your revenue from sales minus the cost of revenue. Operating income ascertains what amount of the revenues that a company earns will be considered as profits. Its concept is the same as earnings before interest and taxes (EBIT) of a firm, and are said to be the operating profit or recurring profit.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social how to calculate amortization Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.