Operating Income

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Operating Income

Operating Income =

Gross income - operating expenses - depreciation and amortization

AKA: EBIT

INTERPRETATION

Operating income measures earnings from its operational activities –the amount of money a company makes from its core business activities, not including other income expenses not directly related to the core activities of the business.

Business owners, managers, and other interested parties use it to determine how much revenue will eventually become a profit.

Note: expanded calculation

Subtract operating expenses, depreciation, and amortization from gross income. (not including interest or income tax expense)

EXAMPLE

M&M sold $200,000 of widgets during the year and had the following expenses. They also sold their delivery truck at a loss of $50,000.

Cost of goods sold: $35,000

Rent: $12,000

Utilities: $5,000

Wages: $50,000

Insurance: $10,000

Operating Income = ($200,000 – $35,000) – ($12,000 + $5,000 + $50,000 + $10,000) – $0.00 = $88,000

M&M had an $88,000 profit from operations, but the $50,000 loss from the sold vehicle is not included because the loss is a non-operating activity.

BENCHMARK: ROT

The higher the operating income, the more profitable the company is. It signifies that the company earns enough money from business operations to pay its costs of doing business and have revenue left to provide a profit.

If a company’s operating income is negative, it will likely need outside funding to continue operating.

Operating Income :

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.