Income From Operations Formula

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 13, 2021

How to Find Operating Income

Operating income shows a company’s profit after subtracting all operating expenses. 

These can include employee wages, advertising fees and administrative expenses. 

However, it does not include factors that affect a company’s net income such as gains from sales of assets or non-operating expenses including one-time losses or interest and tax expenses. 

It does, however, include cost of goods sold or sales costs, which is the only factor used to deduct from total revenue when calculating gross profit or gross income

Thus, operating income is more general than gross income but more specific than net income in how it weighs a company’s expenses against its revenue.

Where Operating Income Is Located

Operating income is often included in an income statement, usually just before Earnings Before Income & Taxes (EBIT), a slightly more generalized measure of earnings. 

Operating income can also be pretty easily manually calculated, especially when starting from gross income. 

Operating Income vs Net Income

The net income shows a company’s total profit when all revenues and expenses are factored in. 

It is almost always listed at the bottom of an income statement, which is how it gets its moniker of “the bottom line.”Other calculations of profit, income or earnings, such as gross income, EBIT and operating income, are all more specific interpretations of net income that exclude certain revenues and expenses.

Operating Income Examples

Examples of factors seen in net income but not operating income include interest, taxes, income from asset sales or other alternate revenue streams, one-time losses and various other uncommon expenses. 

A net income also includes all expenses and revenue that are seen in operating income such as gross income, depreciation, sales expenses and administrative expenses.

Why Use Operating Income?

While operating income lacks the complete overview of a company’s profitability that net income provides, its specificity can still be a valuable tool when looking at a company’s finances. 

For instance, if a company is showing at a loss in its bottom line (or net income), an operating income can show whether that company is still turning a profit in its day-to-day operations or whether it is operating at a loss by taking on too many expenses in its normal course of operations.

Why Is Operating Income Valuable?

While operating income lacks the complete overview of a company’s profitability that net income provides, its specificity can still be a valuable tool when looking at a company’s finances. 

For instance, if a company is showing at a loss in its bottom line (or net income), an operating income can show whether that company is still turning a profit in its day-to-day operations or whether it is operating at a loss by taking on too many expenses in its normal course of operations.

Operating Income Calculation

The easiest way to calculate operating income starts with calculating gross income first. 

Gross income takes the total revenue a company has accumulated from its various revenue streams and subtracts it by the cost of goods sold or sales costs. Because the cost of goods sold is also factored into determining operating income, starting with gross income allows one to focus on listing other operating expenses such as employee salary and wages as well as research and marketing costs.

Operating Income Formula

Operating Income Importance

While operating income may not be as holistic of a picture of a company’s profitability as net income, it is a crucial metric in order to understand the type of profit a company is turning from just its day-to-day operations.