Table of Contents
- What Is Operating Income?
- Understanding Operating Income
- Operating Income Formulas and Calculations
- Operating Income Formula: Top-Down Approach
- Operating Income Formula: Bottom-Up Approach
- Operating Income Formula: Cost Accounting Approach
- Operating Income vs. Other Income Measures
- Operating Income vs. Revenue
- Operating Income vs. Net Income
- Operating Income vs. EBIT and EBITDA
- Example of Operating Income
- Is Operating Income the Same As Profits?
- What Is Non-Operating Income?
- Where Would I Find a Company's Operating Income?
- The Bottom Line
What Is Operating Income?
Let me explain operating income directly: it's the profit a company earns after subtracting its operating expenses, such as wages, depreciation, and cost of goods sold (COGS), from its revenue.
These operating expenses cover all costs involved in manufacturing, selling, and distributing products, but they don't include taxes, interest, or one-time items that could distort the figures.
You calculate it by starting with gross income—total revenue minus COGS—and then deducting all those operating expenses.
Key Takeaways
- Operating expenses include normal business costs like manufacturing, overhead, sales, and administrative expenses.
- Operating income equals earnings before interest and taxes (EBIT).
- Net income accounts for interest and taxes, which operating income does not.
Understanding Operating Income
Operating income tells you how much of a company's revenue turns into profit after covering the costs of running the business.
It considers two main expense types: cost of goods sold, which are direct costs like labor, raw materials, and allocated overhead for products sold, and operating expenses, including selling, administrative, and general costs.
We exclude taxes, interest, and major one-time expenses because they can mislead on true operational performance.
If a company shows growing operating income, that's a good sign—it means management is boosting revenue while keeping expenses in check.
Operating Income Formulas and Calculations
You can calculate operating income in three ways: top-down, bottom-up, or using cost accounting.
Operating Income Formula: Top-Down Approach
The top-down formula is: Operating Income = Gross Profit - Operating Expenses - Depreciation - Amortization.
Gross profit is revenue minus COGS. Operating expenses are for selling, admin, and general operations, excluding interest and taxes. Subtract depreciation and amortization since they're not in operating expenses.
Operating Income Formula: Bottom-Up Approach
Start from net income and add back: Operating Income = Net Income + Interest Expense + Tax Expense.
This requires a full income statement, where operating income might already appear near the bottom.
Operating Income Formula: Cost Accounting Approach
If using direct and indirect costs internally: Operating Income = Net Revenue - Direct Costs - Indirect Costs.
Net revenue accounts for returns or deductions from gross revenue.
Operating Income vs. Other Income Measures
Companies report income in various forms, like gross revenue, net income, EBIT, or EBITDA—operating income is one of them.
Operating Income vs. Revenue
Revenue is the top line: gross is total money in, net subtracts discounts or returns. It ignores expenses, unlike operating income, which deducts nearly all costs. Revenue shows sales success, but operating income reveals spending efficiency.
Operating Income vs. Net Income
Operating income excludes other income, non-operating items, while net income includes everything. Usually, operating income is higher and appears above net income on statements.
Operating Income vs. EBIT and EBITDA
Operating income matches EBIT for most companies, excluding interest and taxes. EBITDA adds back depreciation and amortization, making it larger than operating income.
Example of Operating Income
Take Apple's income statement for the three months ending March 29, 2025: revenue was $95.359 billion, up from $90.753 billion prior year. Operating income rose to $29.589 billion from $27.900 billion, with operating expenses at $15.278 billion versus $14.371 billion. Net income grew to $24.780 billion from $23.636 billion.
Is Operating Income the Same As Profits?
Not quite—it's revenue minus COGS and operating expenses, but ignores taxes, interest, and financing that cut into overall profits.
What Is Non-Operating Income?
It's income from non-core activities, like dividends, investments, forex changes, or asset write-downs.
Where Would I Find a Company's Operating Income?
Look toward the bottom of the income statement, next to non-operating income, to see core vs. other sources.
The Bottom Line
Companies focus on operating income over net income to check if they're managing core costs well. You'll find it near the end of their latest income statement.
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