Operating Income
Operating income is the profit a company makes from its core business after operating expenses, but before interest and taxes.
Operating income shows how profitable a company's main business is. It is calculated as revenue minus the cost of goods sold and minus operating expenses such as wages, rent, marketing, research and depreciation. Interest payments, taxes and income from investments are not included.
Because it leaves out financing and tax effects, operating income makes it easier to compare how well different companies run their businesses, even if one carries a lot of debt and another carries none. It is often treated as similar to EBIT, earnings before interest and taxes, although the two can differ slightly when a company has non-operating items.
Dividing operating income by revenue gives the operating margin, a key measure of efficiency and pricing power.
Example: a manufacturer has revenue of $800 million, production costs of $480 million and operating expenses of $200 million. Its operating income is $120 million, and its operating margin is 15%.
Investors watch the trend over time. Rising operating income with steady revenue suggests better cost control, while falling operating income may signal pricing pressure or rising costs.