Definition of 'Operating Income'
Operating income measures a business’ efficiency and performance and is the profit after operating expenses have been subtracted. Having no impact on operating expenses is interest, taxes or one-time or non-recurring expenses.
TheStreet Explains ‘Operating Income’
To determine a company’s operating income, the business should consider all aspects of the company’s operating expenses. This includes employee wages, sold products or services (also referred to as cost of goods sold aka COGS), equipment, building utilities and overhead such as office supplies etc. To calculate the operating income, add the operating expenses and remove the depreciation.
For example, Al’s Liquor Store earns $1,000,000 in gross revenue from liquor, soda and mixer sales. Al’s supplier charges him $200,000 for beer, wine, hard liquor and mixers with other expenditures being employee wages, which are $250,000. Al removes $50,000 in depreciation for refrigeration equipment and the small forklift he recently purchased. To determine his operating income, the calculation would be: $1,000,000 - $200,000 - $250,000 - $50,000 = $500,000.
Not all companies show a consistent operating income statement. Businesses that may still be profitable, but have a more volatile operating income statement are jewelry companies, resorts, homebuilders or automotive manufacturers. These companies may have tremendous sales during peak time periods but then experience a lull in sales during off-season or certain times. These companies can still turn a profit, but their operating income will not be steady, but rather have significant peaks and valleys. For investors, only evaluating a company based on operating income during a certain time period will not provide them with a valid outlook. Rather, the investor should examine operating income over a series of years to identify a trend.
Operating income is also referred to as recurring profit or operating profit, the same as earnings before interest and taxes (EBIT). Non-operating income includes EBIT, which usually less than operating income.
Companies and investors turn to operating income because it determines the profitability and efficiency of a company--the higher the operating income, the more profitable the business. Investors use operating income to compare companies from the same industry.
Terms Related to 'Operating Income':
COGS is a term that stands for cost of goods sold, and represents t...
Articles Related to 'Operating Income':
By TheStreet Ratings | 02/05/09 - 01:37 PM EST
By Trefis | 05/11/11 - 12:05 PM EDT