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What Is Operating Income & How To Calculate It

Operating income is the profit realized from a business's operations after deducting operating expenses from gross profit.

Why is operating income important?

Operating income is a key measure of a company's profitability from its core business operations, excluding non-operating income and expenses.

An easy way to understand operating income is:

Think of it as a company's paycheck. Just like a paycheck is the money you earn from your job after taxes and deductions, operating income is the money a company earns from its core business after expenses.

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


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.

Frequently Asked Questions

What is operating income and how is it calculated?

What does operating income reveal about a company's core business efficiency?

How do changes in operating income affect a company's financial outlook?

What are the major factors that influence operating income?

How does operating income differ from EBITDA?

Why is operating income a key indicator for investors?

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