We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Operating Income?

By Brendan McGuigan
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Operating income is a calculation for a company of the difference between the operating revenue and the operating expenses of that company. Operating income is frequently used as a synonym for earnings before interest and taxes (EBIT), although strictly speaking EBIT includes non-operating income as well as operating income. It is an important concept both for a company to determine their own health, as well as for an investor to be able to gauge the earnings potential of a company before they invest in it.

There are two main things calculated to determine operating income at a company: the operating revenue of the company and the operating expenses. Operating revenue is any revenue that comes in through standard revenue channels, such as sales of widgets, but excludes things like interest income or dividend income. Operating expenses are the expenses incurred in the daily operations of the company, but exclude extraordinary expenses. Generally, one can look at operating revenue as the revenue from sources that recur from year to year, and operating expenses as the expenses within a class that recurs from year to year.

Expenses that may be left out of operating expenses, and therefore out of calculating operating income, include things like paying out to a class action suit. Since it is assumed this is a cost that will only happen once, it isn’t particularly relevant to looking at the potential earnings of subsequent years. Similarly, income that comes in from investments in other companies isn’t really a reflection of how well the business itself is doing, only of how well its investments are doing, and therefore is generally left out of the calculation of operating income.

For a concept like this, an example may be the best way to show the difference between the different calculations. We will look at a fictitious manufacturing company, which produces and sells widgets. As an investor, looking at buying equity in the company, we are interested in how well they do as a business, and so we want to know their operating income and their earnings before interest and taxes.

First, we look at their operating revenue. This is fairly straightforward, as we only have to look at how much money they have brought in from their sale of widgets around the world. This includes all of their store locations, their wholesaling operations, and their online sales. The total number is $5 billion US Dollars (USD).

Next, we look at their operating expenses. To make their widgets, they spend $2.2 billion USD, which accounts for the raw supplies, leases on their factories, their distribution network, and their employees. They spend another $1.1 billion USD on administrative costs, including their executive compensation, legal expenses, and other staff. Around $150 million USD goes to amortization and depreciation. And they spend about $50 million USD on miscellaneous other expenses that recur year to year. So all told their operating expenses are $3.5 billion USD.

That means that their total operating income is $1.5 billion USD, which we get from subtracting their operating expenses from their operating income. If they also made $150 million USD from things like gains through their foreign exchange and other non-operating income, we would calculate their total earnings before interest and taxes as $1.65 billion USD. From there we could also add in their net interest income and expenses, and the taxes they paid out, to figure out their total net income.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By anon244366 — On Feb 01, 2012

Exchange differences are not mentioned in a lot of EBIT discussions. Should this be part of expenses BEFORE EBIT or should this be treated the same as interest income/expenses? Think also about fx differences on operations and on investments.

By oasis11 — On Feb 16, 2011

Catapult – That maybe true but a company that exhibits high expenses will have negative operating income and that is a factor in determining how healthy a company is.

If a company has negative operating income that means that they are spending more than they are bringing in. This would be a company that is mismanaged and as a potential investor I would not want to buy a corporate bond or a stock from a company like that.

I think that operating income is an important area because you can see how the company is managing its finances.

By Catapult — On Feb 06, 2011

Operating income does not really sound to me like very reliable number for rating a company's health. Sure, there might be things that are one time expenses and shouldn't be counted, but my guess is that there will be some of those every single year, and a number which takes these occurrences into account is probably much better for determining the health of a business.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.