The Income Statement: Operating Income

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The Income Statement: Operating Income

Operating income is a company’s earnings from its core operations after it has deducted its cost of goods sold and its general operating expenses.

Operating income does not include interest expenses or other financing costs. Nor does it include income generated outside the normal activities of the company, such as income on investments or foreign currency gains.

An easy way to calculate operating income is as follows:

Operating Income = (Gross profit – General Operating Expenses – Depreciation Expense)

General operating expenses

General operating expenses are normal expenses incurred in the day-to-day operation of running a business. Typical items in this category include sales or marketing expenses, salaries, rent, and research and development costs.

Depreciation

Depreciation is the gradual loss in value of equipment and other tangible assets over the course of their useful lives. Accountants use depreciation to allocate the initial purchase price of a long-term asset to all of the periods for which the asset will be used.

Why operating income matters to investors

Operating income is particularly important because it is a measure of profitability based on a company’s operations. In other words, it assesses whether or not the foundation of a company is profitable.

It ignores income or losses outside of a company’s normal domain. It also excludes extraordinary events, such as lawsuits or natural disasters, which in a typical year would not affect the company’s bottom line.