What Income From Operations Means
Let me explain income from operations (IFO) directly to you—it's the profit your business generates from its core activities, excluding any income from other sources like investments or selling off assets.
Defining Income From Operations
You might hear income from operations referred to as operating income or EBIT. It's the profit that comes straight from running your main business, without counting miscellaneous income from elsewhere. For instance, if you're a manufacturing company, this wouldn't include money from selling your factory property.
Understanding Income From Operations (IFO)
Income from operations is essentially the same as operating income. When you focus only on the profit from normal business operations, it becomes clearer to see the company's potential for future profitability. To figure it out, take your revenue from operations and subtract the cost of goods sold along with other operating expenses, like labor costs. Don't include interest earned or paid, and skip deducting taxes. Also, leave out any gains or losses from investments or buying and selling business assets. This metric sticks strictly to the revenue and expenses tied to the everyday running of your business.
Examples of Income From Operations
Consider this example: if a car company spends $100,000 to build and sell cars, then sells them for $110,000, it ends up with $10,000 in income from operations. Since this comes purely from normal operations, you as an investor could reasonably expect similar income each year if operations keep going.
Here's another one—suppose Bob sells apples. He takes the revenue from those sales, subtracts the costs for caring for and picking the apple trees while they grew, and then subtracts what he paid people to handle, pick, or sell the apples. Whatever's left is the operating income from Bob's apple business.
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