What is “Operating Income”?

Operating income is a key financial metric that represents a company’s profit from its primary operations. It is calculated by subtracting operating expenses (such as wages, rent, and cost of goods sold) from gross profit. Operating income excludes income from non-core activities, like interest earnings or tax benefits. It is often used interchangeably with operating profit or EBIT (Earnings Before Interest and Taxes).

Example

"The company’s operating income showed a significant improvement, suggesting better control over its operational costs and more revenue from core business activities."

How is “Operating Income” Used in Business?

Operating income is crucial for business owners, investors, and analysts to evaluate the performance of a company’s core operations without the influence of external financial factors like taxes and interest payments. It helps determine whether the company’s core business is profitable and efficient.

Pro Tip

To get a clear picture of operational efficiency, compare operating income to total revenue. A strong operating income relative to revenue shows that a company can generate significant profit from its main activities.

Related Terms

Operating Profit, EBIT, Gross Profit, EBITDA