How To Calculate Operating Income
Operating income, also known as operating profit or earnings before interest and taxes (EBIT), is a measure of a company's profitability from its core business operations. It represents the amount of money a company earns from its primary business activities before considering interest expenses, taxes, and non-operating items.
To calculate operating income, use the following formula:
Operating Income = Total Revenue - Cost of Goods Sold (COGS) - Operating Expenses
Where:
Total Revenue is the total amount of money earned by the company from its primary business activities.
Cost of Goods Sold (COGS) is the direct cost of producing the goods or services sold by the company.
Operating Expenses are the costs incurred by the company to maintain and run its day-to-day business operations, such as selling, general, and administrative expenses, research and development expenses, and depreciation and amortization.
For example, let's consider a company with the following financial information:
Total Revenue: $1,000,000
Cost of Goods Sold: $600,000
Operating Expenses: $250,000
To calculate the operating income:
Operating Income = $1,000,000 - $600,000 - $250,000
Operating Income = $150,000
In this example, the company has an operating income of $150,000, which means it earned $150.
Our operating income is a key metric that shows the profitability from our core business activities. It helps us evaluate the effectiveness of our operational management and financial strategies, guiding adjustments to improve profitability.
.png)
.png)
