After subtracting operational indirect and direct costs from sales revenue, operating income, most commonly known as operating profit or Earnings Before Interest and Taxes (EBIT), is what’s left of revenue. This can also be calculated by deducting gross income from amortization, depreciation, and non-directly related operational expenses.
Selling, general, and administrative expenses or SG&A, amortization, depreciation, and other operating expenses are all part of the operating expenses. Interest income, interest expense, and other non-operational revenue sources are excluded from operating income computations. Nonrecurring items, like money paid as part of a case settlement, are also excluded. The operating margin, which represents a firm’s operational efficiency, is calculated using operating income. The following contains the formula for calculating operating income:
Although a substantial operating income is usually a sign of profitability, there are times when a firm generates money from operations but has to pay more in taxes and interest. This could be the result of a one-time charge, the firm’s poor financial decisions, or the growing interest rate, all of which affect outstanding debts. Alternatively, a firm could earn a significant amount of interest income that is not recorded as operating income.
Operating income is reported on the income statement as a separate line item near the end of the statement. It should be placed alongside non-operating income to let investors differentiate between the two and determine which money came from which sources.