Operating Income

Industry:

Market-Wide

Valuation

Efficiency

Profitability

Aliases:

EBIT

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Short Definition

Operating Income (operating profit) is profit from core operations after COGS/Cost of Sales and operating expenses (R&D, Sales & Marketing, G&A). It excludes non-operating items (interest, taxes, investment gains/losses).

Short Definition

Operating Income (operating profit) is profit from core operations after COGS/Cost of Sales and operating expenses (R&D, Sales & Marketing, G&A). It excludes non-operating items (interest, taxes, investment gains/losses).

Short Definition

Operating Income (operating profit) is profit from core operations after COGS/Cost of Sales and operating expenses (R&D, Sales & Marketing, G&A). It excludes non-operating items (interest, taxes, investment gains/losses).

Why it matters for Investors

  • Core earnings power: Shows how profitable the business is before financing and taxes.

  • Comparable across firms: Less distorted by capital structure or one-off items.

  • Driver of valuation: Feeds operating margin, EBITDA, and DCF models.

Why it matters for Investors

  • Core earnings power: Shows how profitable the business is before financing and taxes.

  • Comparable across firms: Less distorted by capital structure or one-off items.

  • Driver of valuation: Feeds operating margin, EBITDA, and DCF models.

Why it matters for Investors

  • Core earnings power: Shows how profitable the business is before financing and taxes.

  • Comparable across firms: Less distorted by capital structure or one-off items.

  • Driver of valuation: Feeds operating margin, EBITDA, and DCF models.

Formula

Practical considerations -

  • What’s “operating” (policy): Define what sits in COGS vs. R&D/S&M/G&A; apply consistently.

  • Exclude non-operating: Interest income/expense, FX, investment fair-value changes, and taxes stay out.

  • Stock comp & D&A: Included in OpEx/COGS under GAAP (EBITDA adds back D&A; “ex-SBC” is non-GAAP—label it).

  • Capitalized costs: Capitalized software/R&D reduces OpEx now; amortization hits later—be consistent and disclose.

  • Adjusted views: If you exclude one-offs (restructuring, impairments), label Adjusted Operating Income and reconcile.

Formula

Practical considerations -

  • What’s “operating” (policy): Define what sits in COGS vs. R&D/S&M/G&A; apply consistently.

  • Exclude non-operating: Interest income/expense, FX, investment fair-value changes, and taxes stay out.

  • Stock comp & D&A: Included in OpEx/COGS under GAAP (EBITDA adds back D&A; “ex-SBC” is non-GAAP—label it).

  • Capitalized costs: Capitalized software/R&D reduces OpEx now; amortization hits later—be consistent and disclose.

  • Adjusted views: If you exclude one-offs (restructuring, impairments), label Adjusted Operating Income and reconcile.

Formula

Practical considerations -

  • What’s “operating” (policy): Define what sits in COGS vs. R&D/S&M/G&A; apply consistently.

  • Exclude non-operating: Interest income/expense, FX, investment fair-value changes, and taxes stay out.

  • Stock comp & D&A: Included in OpEx/COGS under GAAP (EBITDA adds back D&A; “ex-SBC” is non-GAAP—label it).

  • Capitalized costs: Capitalized software/R&D reduces OpEx now; amortization hits later—be consistent and disclose.

  • Adjusted views: If you exclude one-offs (restructuring, impairments), label Adjusted Operating Income and reconcile.

Worked Example

Line Item

Amount

Notes

Revenue

$50,000,000


Cost of Goods Sold

$22,500,000


Gross Profit

$27,500,000

Revenue - Cost of Goods Sold

R&D Expense

$6,000,000

Operating Expense

S&M Expense

$9,000,000

Operating Expense

G&A Expense

$5,000,000

Operating Expense

Operating Income

$7,500,000

$27.5M − $6M − $9M − $5M

Operating Margin (%)

15%

($7.5M ÷ $50.0M) × 100

Notes

  • Stay operating-only: No interest/tax/investment gains here.

  • Consistent classifications: Keep hosting, fulfillment, and delivery costs in COGS; salaries/tools in the right OpEx bucket.

  • If adjusted: Call it Adjusted Operating Income and bridge to GAAP.

Worked Example

Line Item

Amount

Notes

Revenue

$50,000,000


Cost of Goods Sold

$22,500,000


Gross Profit

$27,500,000

Revenue - Cost of Goods Sold

R&D Expense

$6,000,000

Operating Expense

S&M Expense

$9,000,000

Operating Expense

G&A Expense

$5,000,000

Operating Expense

Operating Income

$7,500,000

$27.5M − $6M − $9M − $5M

Operating Margin (%)

15%

($7.5M ÷ $50.0M) × 100

Notes

  • Stay operating-only: No interest/tax/investment gains here.

  • Consistent classifications: Keep hosting, fulfillment, and delivery costs in COGS; salaries/tools in the right OpEx bucket.

  • If adjusted: Call it Adjusted Operating Income and bridge to GAAP.

Worked Example

Line Item

Amount

Notes

Revenue

$50,000,000


Cost of Goods Sold

$22,500,000


Gross Profit

$27,500,000

Revenue - Cost of Goods Sold

R&D Expense

$6,000,000

Operating Expense

S&M Expense

$9,000,000

Operating Expense

G&A Expense

$5,000,000

Operating Expense

Operating Income

$7,500,000

$27.5M − $6M − $9M − $5M

Operating Margin (%)

15%

($7.5M ÷ $50.0M) × 100

Notes

  • Stay operating-only: No interest/tax/investment gains here.

  • Consistent classifications: Keep hosting, fulfillment, and delivery costs in COGS; salaries/tools in the right OpEx bucket.

  • If adjusted: Call it Adjusted Operating Income and bridge to GAAP.

Best Practices

  • Show both % and $: Operating Income and Operating Margin.

  • Bridge the delta: Price–volume–mix–cost–productivity explains QoQ/YoY moves.

  • Segment it: Product, region, and channel views to surface mix effects.

  • Reconcile adjustments: One-offs out? Disclose and reconcile to GAAP.

Best Practices

  • Show both % and $: Operating Income and Operating Margin.

  • Bridge the delta: Price–volume–mix–cost–productivity explains QoQ/YoY moves.

  • Segment it: Product, region, and channel views to surface mix effects.

  • Reconcile adjustments: One-offs out? Disclose and reconcile to GAAP.

Best Practices

  • Show both % and $: Operating Income and Operating Margin.

  • Bridge the delta: Price–volume–mix–cost–productivity explains QoQ/YoY moves.

  • Segment it: Product, region, and channel views to surface mix effects.

  • Reconcile adjustments: One-offs out? Disclose and reconcile to GAAP.

FAQs

  1. Operating Income vs. EBIT?
    EBIT = NI + Interest + Taxes; often equals Operating Income plus non-operating income. Operating Income excludes non-operating by design.

  2. Operating Income vs. EBITDA?
    EBITDA = Operating Income + D&A (and sometimes other add-backs). It’s a non-GAAP cash-proxy; Operating Income is GAAP.

  3. Does stock-based comp sit in Operating Income?
    Yes. SBC is recorded in OpEx/COGS; it reduces Operating Income (non-cash but real dilution).

  4. Where do restructuring/impairments go?
    Usually operating. If you exclude them for “adjusted” results, label and reconcile.

  5. Can Operating Income be negative?
    Yes—then it’s an operating loss (early stage, heavy R&D/S&M, or weak gross margin).

  6. Do interest income or FX gains count?
    No—those are non-operating; keep them out.

FAQs

  1. Operating Income vs. EBIT?
    EBIT = NI + Interest + Taxes; often equals Operating Income plus non-operating income. Operating Income excludes non-operating by design.

  2. Operating Income vs. EBITDA?
    EBITDA = Operating Income + D&A (and sometimes other add-backs). It’s a non-GAAP cash-proxy; Operating Income is GAAP.

  3. Does stock-based comp sit in Operating Income?
    Yes. SBC is recorded in OpEx/COGS; it reduces Operating Income (non-cash but real dilution).

  4. Where do restructuring/impairments go?
    Usually operating. If you exclude them for “adjusted” results, label and reconcile.

  5. Can Operating Income be negative?
    Yes—then it’s an operating loss (early stage, heavy R&D/S&M, or weak gross margin).

  6. Do interest income or FX gains count?
    No—those are non-operating; keep them out.

FAQs

  1. Operating Income vs. EBIT?
    EBIT = NI + Interest + Taxes; often equals Operating Income plus non-operating income. Operating Income excludes non-operating by design.

  2. Operating Income vs. EBITDA?
    EBITDA = Operating Income + D&A (and sometimes other add-backs). It’s a non-GAAP cash-proxy; Operating Income is GAAP.

  3. Does stock-based comp sit in Operating Income?
    Yes. SBC is recorded in OpEx/COGS; it reduces Operating Income (non-cash but real dilution).

  4. Where do restructuring/impairments go?
    Usually operating. If you exclude them for “adjusted” results, label and reconcile.

  5. Can Operating Income be negative?
    Yes—then it’s an operating loss (early stage, heavy R&D/S&M, or weak gross margin).

  6. Do interest income or FX gains count?
    No—those are non-operating; keep them out.

Related Metrics


Gross Profit, Operating Margin (%), EBIT, EBITDA, Free Cash Flow (FCF), Net Income, Rule of 40


Commonly mistaken for:

  • EBIT: May include non-operating income; Operating Income doesn’t.

  • EBITDA: Adds back D&A; higher than Operating Income.

  • Net Income: Includes interest, taxes, and all non-operating items.

Related Metrics


Gross Profit, Operating Margin (%), EBIT, EBITDA, Free Cash Flow (FCF), Net Income, Rule of 40


Commonly mistaken for:

  • EBIT: May include non-operating income; Operating Income doesn’t.

  • EBITDA: Adds back D&A; higher than Operating Income.

  • Net Income: Includes interest, taxes, and all non-operating items.

Related Metrics


Gross Profit, Operating Margin (%), EBIT, EBITDA, Free Cash Flow (FCF), Net Income, Rule of 40


Commonly mistaken for:

  • EBIT: May include non-operating income; Operating Income doesn’t.

  • EBITDA: Adds back D&A; higher than Operating Income.

  • Net Income: Includes interest, taxes, and all non-operating items.

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‹ Operating Expense

‹ Operating Expense

Free Cash Flow ›

Free Cash Flow ›

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Index

Short Definition

Why it matters for Investors

Formula

Worked Example

Best Practices

FAQs

Related Metrics

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