Operating income is the amount of profit from operations of a company after deducting operating costs, such as cost of goods sold (CGS), wages and depreciation. If all operating costs and depreciation are deducted from gross income ( or revenue) of a company, what will remain is the operating income. A business’s operating expenses include office supplies, heat and electricity etc. Operating income is also commonly known as “operating profit” or “recurring profit” or “Earnings Before Interest and Taxes (EBIT).”
Operating Income Formula
Operating income = gross income – operating expenses – depreciation – amortization
While measuring operating income interest expenses, tax expenses and outside investment expenses are not included in the calculation.
Operating Income Example: How do you calculate income from operations?
Apple Technology Company earned operating income of 60.02 billion USD in fiscal year 2016. It has total revenue of $215,639,000, cost of goods sold of $131,376,000 and gross profit of $84,263,000. Now after deducting operating expenses from this gross profit figure Apple Company earned operating income of $60,024,000. See the following Annual Income Statement of Apple Company.
Lets take another example of Walt Disney Company which earned 14.20 billion USD in 2016.
The company earned $25,639,000 gross profit (total revenue $55,632,000 minus cost of revenue $29,993,000). After deducting the operating expenses The Walt Disney Company earned operating income of $14,202,000 in fiscal year 2016.
Importance of Operating Income
Operating income is an indirect measure of performance of a company. Higher operating income means company’s business is more profitable. It also shows the efficiency of the company in utilising its resources for generating more profit. If a company is not efficient in utilising its resources then the company might be paying more for materials, labor and other day-to-day expenses.
While comparing the results of different companies’ operating income, it must be done in the same industry because different industries may have different labor and material costs.
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