What Is Operating Income?

What Is Operating Income?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Operating income, also known as operating profit or operating earnings, is the profit a business makes after subtracting operating expenses. These expenses include costs such as raw materials, wages, and overheads, but do not include taxes and interest payments. It’s a useful metric for company analysts and investors because it measures the profitability of a company’s core business functions, ignoring the influence of tax strategy and capital structure.

Related Questions

1. How is operating income calculated?

Operating income is typically calculated by subtracting operating expenses (like cost of goods sold, wages, and depreciation) from gross revenue. It can be found on the company’s income statement.

2. What does operating income tell you about a company?

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Operating income is a measure of a company’s profitability from its core business functions, before interest and taxes are taken into account. It can help you understand how well a company is managing its operating costs in relation to its income.

3. How does operating income differ from net income?

Operating income doesn’t include interest and taxes while net income does. Therefore, operating income can provide a clearer view of a company’s operating efficiency, while net income includes all expenses and incomes, giving a total profitability picture.

4. Can a company have a positive operating income but a negative net income?

Yes, a company can have positive operating income but negative net income. This is because operating income only considers revenue and operating expenses, while net income also takes into account interest and taxes. If these costs are greater than the operating income, the net income could be negative.

5. Is higher operating income always better?

Generally, a higher operating income indicates that a company is keeping its operating costs under control while increasing revenues. However, an unusually high operating income might be due to cost-cutting measures that could impact long-term business health, such as reduced staff training or lower quality materials. It’s important to look at trends and compare with industry peers.