What Is Operating Income?

Operating income is the amount of profit that a company has realized after its operating expenses such as wages, 澳洲幸运5官方开奖结果体彩网:depreciation, and 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS) are deducted.

The number for operating expenses includes all of the costs of manuꦅfacturing, selling, and distributing a product but excludes taxes, interest, and one-time expenses that can skew the numbers.

Operating income is calculated by taking the company's 澳洲幸运5官方开奖结果体彩网:gross income, which is equivalent tꩲo its total revenue minus COGS, an💦d subtracting all operating expenses.

Understanding Operating Income

Operating income shows how much of a company's revenue 澳洲幸运5官方开奖结果体彩网:will eventually become profits considering how m💦uch it costs to run the bus🃏iness.

Operating income factors in two major types of expenses: cost of goods sold and operating expenses. Cost of goods sold are the expenses directly related to manufacturing a product and include labor, 澳洲幸运5官方开奖结果体彩网:raw materials, and overhead allocated to items sold. Operating expenses inᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚclude s🌄elling, administrative, and general expenses.

Taxe🍌s, interest expenses, and big one-time expenses are not i💧ncluded in this formula because they might skew the numbers for profit or net income.

A company that's generating an increasing amount of operating inc�🍬�ome is looked on favorably. It means that the company's management is generating more revenue while contro𓆏lling its expenses.

Operating Income Formulas and Calculations

Operating income can be calculated in three ways. One approach is top-downꦦ, one apಌproach is a bottom-up approach, and one leverages cost accounting classifications.

Operating Income Formula: Top-Down Approach

The formula for op🧸erating income using the top-down aꦓpproach is:

$\begin{aligned}&\text{Operating Income} = \text{GP} - \text{OE} - \text{D} - \text{A} \\&\textbf{where:} \\&\text{GP} = \text{Gross profit} \\&\text{OE} = \text{Operating expenses} \\&\text{D} = \text{Depreciation} \\&\text{A} = \text{Amortization} \\\end{aligned}$​Operating Income=GP−OE−D−Awhere:GP=Gross profitOE=Operating expensesD=DepreciationA=Amortization​

澳洲幸运5官方开奖结果体彩网:Gross profit is the net profit earned after 💖the cost of goods sold is subtracted from net revenue. Operating expenses are the selling, administrative, and general expenses necessary to operate a business, though this does not include interest or taxes.

Because operating expenses do not incorporate allocated costs, depreciation and amortization must also be subtracted.

Operating Income Formula: Bottom-Up Approach

Instead of starting with revenue, you can calculate operating income starting with net income. Because net income is calculated by subtracting a꧅ few items from operating income, you add them back in to arrive at operating income:

$\begin{aligned}&\text{Operating Income} = \text{NI} + \text{IE} + \text{TE} \\&\textbf{where:} \\&\text{NI} = \text{Net income} \\&\text{IE} = \text{Interest expense} \\&\text{TE} = \text{Tax expense} \\\end{aligned}$​Operating Income=NI+IE+TEwhere:NI=Net incomeIE=Interest expenseTE=Tax expense​

In this formula, you must have a fully calculated income statement, as net income is the last component listed on financial statements. In this case, the company may already be reporting operating income towards the bottom of the report.

Operating Income Formula: Cost A♛ccounting Approach

Though 澳洲幸运5官方开奖结果体彩网:direct costs and indirect costs are not widely used in financial accounting, a company may classify these types of expenses for internal use. If so, it can find operating income by simply subtracting all of these costs from net revenue (as taxes and interest are often not cla♓ssified as either):

$\begin{aligned}&\text{Operating Income} = \text{NR} - \text{DC} - \text{IC} \\&\textbf{where:} \\&\text{NR} = \text{Net revenue} \\&\text{DC} = \text{Direct costs} \\&\text{IC} = \text{Indirect costs} \\\end{aligned}$​Operating Income=NR−DC−ICwhere:NR=Net revenueDC=Direct costsIC=Indirect costs​

In this formula, net revenue is used in case there have been product returns or other deductions to make to gross revenue.

Operating Income vs. Other Income Measures

A company's income is reported in various ways. In addition to operating income, the report may quote the company's numbers for gross revenue, net income, EBIT (earnings before interest and taxes), or EBITDA (earnings before interest, taxes, and amortization.

Operating Income vs. Revenue

When looking at a company's financial statements, revenue is often the highest level of financial reporting. Gross revenue is the total amount of money taken in by a company for a given period. Net revenue is gross revenue minus any discounts, returns, or deductions.

While revenue does not incorporate any expenses, 𒆙operating income does. In fact, it incorpor🍒ates almost every expense of a company.

Revenue shows how successful a company is at selling its product, but operating income is more useful.🥃 It shows how efficiently a company is spending its money to incur that revenue.

Operating Income vs. Net Income

Operating income is not the same as net income. Operating income includes most of the costs of doing business but it disregards other income, non-operating income, and non-ope𒁏rating expenses. Those figures are included in the net 🅘income calculation.

In almost all cases, o🎉perating income will be higher than net income because net income deducts more expenses. For this reason, net income is often the last line reported on an income statement while operating income is usually found a few lines above it.

Operating Income vs. EBIT and EBITDA

Operating income is similar or identical to 澳洲幸运5官方开奖结果体彩网:earnings before interest and taxes (EBIT). EBITꩵ is also referred to as the opera🐈ting profit or recurring profit.

Both measuremen༒ts calculate the amount of money a company earned less a few noncontrollable costs. Technically, EBIT may include other operating expenses outside of interest and taxes but for most companies, these two calculations will be the same.

Earnings before interest, taxes, and amortization (EBITDA), on the other hand, will differ from operating income. EBITDA disregards the co🥃sts of interest, taxes, depreciation, and amortization, resulting in a larger figure than operating income.

Example of Operating Income

The image below represents Apple Inc.'s income statement for the three months ending March 29, 2025. It also records income for the same period in the previous year.

On its income statement, Apple reported $95.359 billion of product and service revenue, up from $90.753 billion a year before. Looking further down its income statement, the company's operating income for the three-month period was $29.589, billion, up from $27.900 billion the year before.

The company's operating expenses grew to $15.278 billion from $14.371 billion in the previous period.

Its net income also grew, to $2🍷4.780 billion from $23.636 billion in the same period of 202🍨4.

The Bottom Line

Companies may be more interested in knowing their operating income instead of their net income because it tells them whether they are controlling their essential costs effe✤ctively.

An investor can find this number towards the bottom of the company's latest quarterly or annual income statement.