Operating income, also called operating profit, represents the profit a company earns from its core business activities before financing costs and taxes. It is shown as a subtotal on the income statement and is closely related to earnings before interest and taxes (EBIT).
It is typically revenue minus operating expenses, which include cost of goods sold (COGS), selling, general and administrative expenses (SG&A), and depreciation and amortization (D&A). It excludes interest income and expense, taxes, and any non-operating gains or losses.
Analysts use operating income to assess operating efficiency and profitability of the core business. The operating margin, computed as operating income divided by revenue, expresses profitability per dollar of sales after covering operating costs. It is useful for trend analysis over time and for benchmarking against peers.
Because it excludes financing costs and taxes, it does not represent total profitability or cash flow. Differences in depreciation practices or one-time items classified as operating can affect comparability across companies or periods.
A company reports revenue of $500 million, COGS of $300 million, SG&A of $100 million, and depreciation and amortization of $20 million; operating income is $80 million.
Revenue · Cost of Goods Sold (COGS) · Operating Margin · Earnings Before Interest and Taxes (EBIT) · Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) · Net Income