Key Takeaways
- Operating expenses are the normal costs of running a business and include not only manufacturing costs but also overhead, sales, and administrative expenses.
- Operating income is the same as earnings before interest and taxes (EBIT).
- The number for net income reflects the costs of interest and taxes.
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Investopedia / Julie Bang
What Is Operating Income?
Operating income is the amount of profit that a company has realized after its operating expenses such as wages, depreciation, and cost of goods sold (COGS) are deducted.
The number for operating expenses includes all of the costs of manufacturing, selling, and distributing a product but excludes taxes, interest, and one-time expenses that can skew the numbers.
Operating income is calculated by taking the company’s gross income, which is equivalent to its total revenue minus COGS, and subtracting all operating expenses.
Understanding Operating Income
Operating income shows how much of a company’s revenue will eventually become profits, considering how much it costs to run the business.
Operating income factors in two major types of expenses: cost of goods sold and operating expenses. Cost of goods sold is the expenses directly related to manufacturing a product and includes labor, raw materials, and overhead allocated to items sold. Operating expenses include selling, administrative, and general expenses.
Taxes, interest expenses, and big one-time expenses are not included in this formula because they might skew the numbers for profit or net income.
A company that’s generating an increasing amount of operating income is looked on favorably. It means that the company’s management is generating more revenue while controlling its expenses.
Operating Income Formulas and Calculations
Operating income can be calculated in three ways. One approach is top-down, one approach is a bottom-up approach, and one leverages cost accounting classifications.
Operating Income Formula: Top-Down Approach
The formula for operating income using the top-down approach is:
Operating Income=GP−OE−D−Awhere:GP=Gross profitOE=Operating expensesD=DepreciationA=Amortization
Gross profit is the net profit earned after the cost of goods sold is subtracted from net revenue. Operating expenses are the selling, administrative, and general expenses necessary to operate a business, though this does not include interest or taxes.
Because operating expenses do not incorporate allocated costs, depreciation and amortization must also be subtracted.
Operating Income Formula: Bottom-Up Approach
Instead of starting with revenue, you can calculate operating income starting with net income. Because net income is calculated by subtracting a few items from operating income, you add them back in to arrive at operating income:
Operating Income=NI+IE+TEwhere:NI=Net incomeIE=Interest expenseTE=Tax expense
In this formula, you must have a fully calculated income statement, as net income is the last component listed on financial statements. In this case, the company may already be reporting operating income towards the bottom of the report.
Operating Income Formula: Cost Accounting Approach
Though direct costs and indirect costs are not widely used in financial accounting, a company may classify these types of expenses for internal use. If so, it can find operating income by simply subtracting all of these costs from net revenue (as taxes and interest are often not classified as either):
Operating Income=NR−DC−ICwhere:NR=Net revenueDC=Direct costsIC=Indirect costs
In this formula, net revenue is used in case there have been product returns or other deductions to make to gross revenue.
Operating Income vs. Other Income Measures
A company’s income is reported in various ways. In addition to operating income, the report may quote the company’s numbers for gross revenue, net income, EBIT (earnings before interest and taxes), or EBITDA (earnings before interest, taxes, and amortization.
Operating Income vs. Revenue
When looking at a company’s financial statements, revenue is often the highest level of financial reporting. Gross revenue is the total amount of money taken in by a company for a given period. Net revenue is gross revenue minus any discounts, returns, or deductions.
While revenue does not incorporate any expenses, operating income does. In fact, it incorporates almost every expense of a company.
Revenue shows how successful a company is at selling its product, but operating income is more useful. It shows how efficiently a company is spending its money to incur that revenue.
Operating Income vs. Net Income
Operating income is not the same as net income. Operating income includes most of the costs of doing business, but it disregards other income, non-operating income, and non-operating expenses. Those figures are included in the net income calculation.
In almost all cases, operating income will be higher than net income because net income deducts more expenses. For this reason, net income is often the last line reported on an income statement, while operating income is usually found a few lines above it.
Operating Income vs. EBIT and EBITDA
Operating income is similar or identical to earnings before interest and taxes (EBIT). EBIT is also referred to as the operating profit or recurring profit.
Both measurements calculate the amount of money a company earned minus a few noncontrollable costs. Technically, EBIT may include other operating expenses outside of interest and taxes, but for most companies, these two calculations will be the same.
Earnings before interest, taxes, and amortization (EBITDA), on the other hand, will differ from operating income. EBITDA disregards the costs of interest, taxes, depreciation, and amortization, resulting in a larger figure than operating income.
Fast Fact
If a company does not have interest expenses, tax expenses, or other non-operational costs, it is possible for a company’s operating income to be the same as its net income.
Example of Operating Income
Apple Inc.’s income statement for the three months ending March 29, 2025, recorded income for the same period in the previous year. On its income statement, which can be accessed from the company’s annual report, Apple reported $95.359 billion of product and service revenue, up from $90.753 billion a year before.
The company’s operating income for the three-month period was $29.589, billion, up from $27.900 billion the year before. The company’s operating expenses grew to $15.278 billion from $14.371 billion in the previous period. Its net income also grew, to $24.780 billion from $23.636 billion in the same period of 2024.
Is Operating Income the Same As Profits?
Not exactly. Operating income is what is left over after a company subtracts the cost of goods sold (COGS) and other operating expenses from the revenues it receives. However, it does not take into consideration taxes, interest, or financing charges, all of which may reduce its profits.
What Is Non-Operating Income?
Non-operating income is the portion of an organization’s income that is derived from activities not related to its core business operations. It can include items such as dividend income, interest, gains or losses from investments, the impact of foreign exchange rate changes, and asset write-downs.
Where Would I Find a Company’s Operating Income?
Operating income can be found toward the bottom of the company’s income statement for the quarter or year as its own line item.
It should appear next to non-operating income, helping investors to distinguish between the two and recognize which income came from what sources.
The Bottom Line
Companies may be more interested in knowing their operating income instead of their net income because it tells them whether they are controlling their essential costs effectively.
An investor can find this number towards the bottom of the company’s latest quarterly or annual income statement.
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