What is Operating Income?

Operating Income is the profit a company earns after deducting all operating expenses—such as Cost of Revenue, Selling, General & Administrative (SG&A), and Research & Development (R&D) expenses—from its Total Revenue. It excludes non-operating items like interest and tax expenses.

Why is Operating Income Important?

Operating Income is crucial because it reflects the profitability of a company's primary business activities without the influence of financing and tax strategies. It allows stakeholders to:

• Evaluate core operational efficiency and performance.
• Compare profitability across companies, regardless of capital structure or tax jurisdiction.
• Understand how well management controls production and operating costs.

How is Operating Income Calculated?

Operating Income can be calculated using the formula:

Operating Income = Total Revenue − Cost of Revenue − Operating Expenses

Where Operating Expenses include SG&A and R&D expenses. Alternatively, starting from Gross Profit:

Operating Income = Gross Profit − Operating Expenses

For example, if a company has $200 million in revenue, $120 million in cost of revenue, and $30 million in SG&A and R&D, its operating income is $200M − $120M − $30M = $50M.

Additional Considerations

• Operating Margin: Expressed as Operating Income divided by Total Revenue (Operating Income ÷ Total Revenue), this metric indicates how much profit a company makes from each dollar of sales after covering operating costs.
• Comparability: Excludes one-time or non-recurring items, offering a clearer view of recurring core profitability.
• Trend Analysis: Tracking Operating Income over time highlights operational improvements or areas needing cost control.