Operating Income: Definition & Calculation

Operating Income: Definition & Calculation


By Rickie Houston CEPF®

What is operating income?

Operating income is a value that is used to demonstrate a company’s profitability after it has deducted other costs such as cost of goods sold (COGS), employee wages and other operating expenses. This measurement also excludes both taxes and non-operating expenses. In this guide, we show you how to calculate operating income.

If you’re in need of professional investing guidance, financial advisors can help you examine companies from both quantitative and qualitative perspectives. Find a financial advisor today. 

What Is Operating Income?

Also known as operating profit and recurring profit, operating income represents the value of a company’s revenue after it has subtracted any operating expenses. This value doesn’t include taxes, and it indicates how profitable a company can be after deducting operational activity costs. Operating expenses might include utilities, employee wages, office supplies, insurance, depreciation and the cost of goods sold (COGS).

Operating income doesn’t include non-operating expenses such as restructuring expenses, interest, lawsuits and inventory charges. This value also commonly strikes comparisons to earnings before interest and taxes (EBIT), but the two differ in that EBIT includes non-operating income.

How to Calculate Operating Income

You can find a company’s operating income by perusing its income statement. The statement will also contain cost of goods sold (COGS) and revenue. To calculate operating income, you’ll need to first determine the company’s gross profit. You’ll determine this value by subtracting COGS from revenue. You’ll then subtract the business’ operating expenses from its gross profit to determine its operating income.

For instance, let’s assume your business made $500,000 in revenue in one month, with the following expenses:

  1. Utilities: $8,000
  2. Employee wages: $120,000
  3. Office supplies: $3000
  4. Insurance: $15,000
  5. Building/property maintenance: $18,000
  6. Cost of goods sold (COGS): $40,000

To calculate gross income, you would subtract the $40,000 in COGS from your $500,000 in revenue. This would give you a gross income of $460,000. You’d then need to subtract gross income from total operating expenses. All expenses above, except for COGS, are operating expenses. The total value in operating expenses, therefore, is $164,000. Finally, subtracting $164,000 from $460,000 gives you an operating income of $296,000.

Bottom Line

Operating income indicates how profitable a company will be after it has deducted operational expenses and cost of goods sold (COGS). This measurement doesn’t include non-operating expenses like inventory costs or interest, and it also excludes taxes. A higher operating income usually means a company will be more profitable, while a lower operating income indicates less profitability.

Tips for Investing
  • Whether you’re a rookie or veteran investor, you should attempt to minimize as much risk as possible. One way to do this is through portfolio diversification and strategic asset allocation. As you build your investment portfolio, it may be more profitable to utilize multiple investments, instead of relying on just one asset class. Our asset allocation calculator can help.
  • Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free financial advisor matching tool connects you with up to three local advisors.

Photo credit: ©iStock.com/Sitthiphong

The post Operating Income: Definition & Calculation appeared first on SmartAsset Blog.

Information contained on this page is provided by an independent third-party content provider. Frankly and this Site make no warranties or representations in connection therewith. If you are affiliated with this page and would like it removed please contact pressreleases@franklymedia.com

Powered by Frankly
All content © Copyright 2000 - 2020 WNCONTENT. All Rights Reserved.
For more information on this site, please read our Privacy Policy, and Terms of Service, and Ad Choices.