Then it means that the company incurred a loss even as it increased sales. Suppose ABC's operating income was $2 million for the previous quarter and -$10,000 for the next one. But closer analysis may reveal a different story. During the previous quarter, ABC had revenues of $75 million.Īn investor looking at those figures might be impressed by the increase.

It also does not include income earned from investment and other activities but operating income provides a more detailed look at a company's ability to make money because it considers the costs involved for a company to generate its income.įor example, if a company ABC reports $100 million in revenue from product sales during the second quarter, then that figure is the total amount of money that the firm made from selling the product. Operating income factors in costs incurred for business activities including Sales, General & Administrative (SG&A) costs, manufacturing expenses etc. It also does not include expenses from other company activities to generate income, such as investments. It does not include expenses incurred during the sale process or manufacturing costs to make the product. Revenue is the total amount of money made by a business or entity from selling products or providing services to customers. While operating income lacks the complete overview of a company's profitability that net income provides, its specificity can still be a valuable tool when looking at a company's finances.įor instance, if a company is showing a loss to its bottom line (or net income), an operating income can show whether that company is still turning a profit in its day-to-day operations or whether it is operating at a loss by taking on too many expenses in its normal course of operations. Net income also includes all expenses and revenue that are seen in operating income such as gross income, depreciation, sales expenses and administrative expenses. Other calculations of profit, income or earnings, such as gross income, EBIT and operating income, are all more specific interpretations of net income that exclude certain revenues and expenses.Įxamples of expenses used in net income but not operating income include interest, taxes, income from asset sales or other alternate revenue streams, one-time losses and various other uncommon expenses. It is almost always listed at the bottom of an income statement, which is how it gets its moniker of 'the bottom line.' The net income shows a company's total profit when all revenues and expenses are factored in. While operating income may not be as holistic of a picture of a company's profitability as net income, it is a crucial metric in order to understand the type of profit a company is turning from just its day-to-day operations. Thus, the formula for calculating operating income breaks down into the following:

Gross income takes the total revenue a company has accumulated from its various revenue streams and subtracts the cost of goods sold or sales costs from it.īecause the cost of goods sold is also factored into determining operating income, starting with gross income to calculate operating income allows one to focus on listing other operating expenses such as employee salary and wages as well as research and marketing costs. The easiest way to calculate operating income starts with calculating gross income first. Operating income can also be pretty easily manually calculated, especially when starting from gross income. Operating income is often included in an income statement, usually just before Earnings Before Income & Taxes (EBIT), a slightly more generalized measure of earnings. Thus, operating income is more general than gross income but more specific than net income in how it weighs a company's expenses against its revenue. It does, however, include cost of goods sold or sales costs, which is the only item deducted from total revenue when calculating gross profit or gross income. Operating income does not include expenditures that affect a company's net income, such as gains from sales of assets or non-operating expenses including one-time losses or interest and tax expenses.

Operating income shows a company's profit after subtracting operating expenses incurred to make a product or provide a service.Įxamples of expenses included under operating income include manufacturing costs, employee wages, advertising fees and administrative expenses.

Total operating expenses formula