Operating Income is the money remaining after subtracting Operating Expenses (including COGS, SG&A Expenses, R&D Expenses), Amortization, and Depreciation from net revenue.
Operating Income = Net Revenue - Operating Expenses - Depreciation - Amortization
As Operating Income is calculated without deducting the cost of debt, special or one-time income from non-core business activities, and taxes, it measures how much profit the company makes solely from its basic operations. Operating Income is also used in calculating other important financial metrics. For instance, dividing operating income by net sales, one arrives at operating margin, which is a key measure of efficiency in intra-industry comparison. (e.g. McDonald's (MCD) vs. Burger King Holdings (BKC) vs. Jack In The Box (JBX)).
[edit] Variations
Once an Analyst has arrived at Operating Income (which is typically given on an the income statement), s/he may be interesting in calculating other comparative measures.
Operating Income Before Depreciation & Amortization = Operating Income + Depreciation + Amortization. This is a metric that is growing in popularity (compared to EBIDTA), due to its exclusion of special one-time income events; thus, it shows only the company's ability to continue producing profit on its operations.
Net Operating Profit After Tax = Operating Income x (1 - Tax Rate). This metric shows the company's potential cash earnings if it was unlevered (if the company had no debt). NOPAT is often used in EVA (Economic Value Added) calculations, and its useful for seeing operating efficiency for leveraged companies.
[edit] References
- http://www.investopedia.com
- http://en.wikipedia.org/wiki/Operating_income
Operating Income
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