The financial accounting term operating income is a measure of a company’s ability to earn money from ongoing operations. Operating income appears as a line item on the income statement, and provides a measure of profitability before interest expense and income taxes are removed.
Operating Income = Revenues – Operating Expenses
- Operating Expenses = COGS + SGA + Depreciation and Amortization + Other
Operating income is a measure of profitable operations before interest expense, or income taxes, are paid. Operating income is sometimes referred to as operating profit, earnings before interest and taxes, or EBIT. Operating income removes from revenues the cost of goods sold; selling, general and administrative expenses; depreciation and amortization; as well as other operating expenses.
Unlike net income, operating profit excludes interest expense, which is a function of the amount of debt the company is using as part of its capital structure. By excluding interest expense, analysts and investors are able to ignore the affect leverage has on the company’s profitability.
The table below illustrates how the calculation of operating income would appear on Company A’s income statement:
|Cost of Goods Sold||(15,693,000)|
|Selling General and Administrative||(7,740,000)|
|Operating Income or Loss||6,178,000|