Corporate Finance & Accounting

Operating income

What is operating income?

Operating income is a corporate finance and accounting term that separates realized profits from the core business of a business. Specifically, it refers to the amount of profit realized from revenue after deducting expenses directly related to operating the business, such as cost of sales (COGS), general and administrative (G&A) expenses, sales and marketing, research and development, depreciation and other operating costs.

Operating income is an important indicator to measure the profitability of a company. Because this metric excludes non-operating expenses such as interest payments and taxes, it can assess how well a company’s main business is performing.

key takeaways

  • Operating income is a measure of the profit realized by a company’s core business.
  • Operating income is a useful number because it excludes taxes and other one-time items that could affect net income for a particular accounting period.
  • A common variation of operating income is operating profit margin, which is a percentage number that represents operating income divided by total revenue.

Understanding Operating Income

Operating income is at the heart of internal and external analysis of how and how much a company makes money. The various components of operating costs can be measured relative to total operating costs or total revenue to help management run the company.

Operating income can often be found in a company’s financial statements — especially at the end of the income statement. While it’s close to the details, operating income isn’t the famous “bottom line” that really shows how well or how poorly a company is doing. This status pertains to the company’s net income, and “net” means the income remaining after taxes, debt repayments, interest expenses, and all other non-operating debits the business encounters.

Operating Income and Operating Profit Margin

Many metric variants derived from operating earnings can also be used to compare a given company’s profitability to that of its industry peers. The most important of these metrics is operating margin, which management and investors track closely from one quarter to the next to indicate earnings trends.

Expressed as a percentage, operating profit margin is calculated by dividing operating income by total income. Or, as a formula:

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