Income from operations includes all profits a company earns directly through its operations, excluding other sources of income such as investments. It is included on accounting statements along with other entries to provide a complete overview of how much money a company earned within a given accounting period and the sources of that income. It is also known as operating income or income from continuing operations and these terms may be used on some accounting statements.
To calculate income from operations, companies start by looking at the total sales revenue from a given accounting period. Then, they subtract operating expenses, including the cost of goods sold. This yields the total profit made from operations within that accounting period. When a company is running at a profit, this number should be positive. If it is running at a loss and selling goods for less than they cost, this number will be negative.
On an accounting statement, income from operations and net income will be different. Net income includes sources of revenue beyond the company's operations, such as dividends, sales of assets, and so forth. These sources of funds will be added to the total income from operations to yield net income. Typically net income is higher because most companies use interest bearing accounts, investments, and other types of activities to bolster their income.
When examining accounting statements, looking at income from operations can provide important data about how healthy a company is and how well it is doing in the long term. If this number starts to fall, it can suggest that operating expenses are rising or sales are falling and the company is not compensating. Steady numbers show that a company is operating at a profit but not expanding and that it may not be keeping pace with the rest of the industry. A rise shows that a company is increasing its profits over the long term.
There are times when the net income can be lower than the income from operations. If a company loses money on investments or is obliged to pay out legal settlements, this can eat into the profits it makes. This is an important fact to take into account when examining financial statements and making judgments about what they mean for the economic health of a company. For publicly traded companies, all of this information will be readily available and can be examined by investors, as well as financial regulators, brokers, and other people with an interest.