Operating income and net income both show the income earned by a company, but the two represent distinctly different ways of expressing a company's earnings. Both metrics have their merits, but also have different deductions and credits involved in their calculations. It's in the analysis of the two numbers that investors can determine where in the process a company began earning a profit or suffering a loss.
Key Takeaways
Operating income is revenue less any operating expenses, while net income is operating income less any other non-operating expenses, such as interest and taxes.
Operating income includes expenses such as selling, general & administrative expenses (SG&A), and depreciation and amortization.
Net income (also called the bottom line) can include additional income like interest income or the sale of assets.
Operating income is a company's profit after deducting operating expenses which are the costs of running the day-to-day operations. Operating income, which is synonymous with operating profit, allows analysts and investors to drill down to see a company's operating performance by stripping out interest and taxes.
Operating expenses include selling, general & administrative expense (SG&A), depreciation and amortization, and other operating expenses. Operating income excludes items such as investments in other firms (non-operating income), taxes, and interest expenses. Also, nonrecurring items such as cash paid for a lawsuit settlement are not included. Operating income is also calculated by subtracting operating expenses from gross profit. Gross profit is total revenue minus costs of goods sold (COGS).
Net Income is a company's profits or earnings. Net income is referred to as the bottom line since it sits at the bottom of the income statement and is the income remaining after factoring in all expenses, debts, additional income streams, and operating costs. The bottom line is also referred to as net income on the income statement.
Net income is calculated by netting out items from operating income that include depreciation, interest, taxes, and other expenses. Sometimes, additional income streams add to earnings like interest on investments or proceeds from the sale of assets.
In short, net income is the profit after all expenses have been deducted from revenues. Expenses can include interest on loans, general and administrative costs, income taxes, and operating expenses such as rent, utilities, and payroll.
Operating Income vs. Net Income Example
Below is the 2017 income statement for J.C. Penney as reported on their 10-K annual statement. The highlighted areas include operating income and net income to demonstrate how the figures are calculated.
Revenue (total net sales) was $12.5 billion. Net sales refer to revenue minus returned merchandise, which is common for retailers.
Operating income was $116 million and included all the expenses associated with operating for the year including rent, utilities, and payroll.
Net income (loss in this case) was negative $116 million, which was a loss for the year and is highlighted in pink at the bottom of the statement.
You'll notice that J.C. Penney earned$116 millionin operating income while earning$12.5 billion in total revenue or net sales. However, after deducting the interest paid on their debt which totaled $325 million, the company's operating income was wiped out. As aresult, net income was a loss of $116 million for the year.
Operating incomeand net incomeboth show income for a company. However,it's important to analyze all areas of their financial statements to determine where acompany is making moneyor losing money as in the case ofJ.C. Penney for 2017.
Operating income is revenue less any operating expenses, while net income is operating income less any other non-operating expenses
non-operating expenses
Non-operating expense, like its name implies, is an accounting term used to describe expenses that occur outside of a company's day-to-day activities. These types of expenses include monthly charges like interest payments on debt and can also include one-time or unusual costs.
Operating income includes only sales or revenue from a business's primary operations after deducting routine operating expenses. Net income includes non-operating income, such as one-time gains from selling assets or investments.
Net income is the profit a company has earned for a period, while cash flow from operating activities measures, in part, the cash going in and out during a company's day-to-day operations.
A key difference is that a company's operating income focuses on the core operations form of a business, whereas net income determines overall profitability. Unlike operating income, net income takes into account additional income streams (i.e., non-operating income like the sale of assets).
A general rule of thumb is that a good operating profit margin sits between 10–20%, meaning the business has a profit of 20 cents on each dollar of revenue after operating costs have been deducted. However, this can vary from industry to industry.
Operating income is a company's profit after deducting operating expenses such as cost of goods sold, wages and depreciation. Operating income = Gross income − Operating expenses.
EBITDA represents a company's core profitability by adding interest, tax, depreciation, and amortization expenses to net income. Meanwhile, operating income is a company's actual profits after subtracting its operational expenses or the costs of normal business operations.
For most business entities, a net operating income percentage of 20% or more is considered good. However, this number can vary depending on the industry and other factors. For example, a net operating income percentage of 30% or more would be considered excellent for retail property.
Gross profit is total revenue minus the cost of goods sold (COGS). From gross profit, operating profit or operating income is the residual income after accounting for all expenses plus COGS. Net income is the bottom line, or the company's income after accounting for all cash flows, both positive and negative.
Net operating income (NOI) is a commonly used figure to assess the profitability of a property. The calculation involves subtracting all operating expenses on the property from all the revenue generated from the property. The higher the revenues and the smaller the expenses, the more profitable a property is.
Share. EBITDA definition. EBITDA, which stands for earnings before interest, taxes, depreciation and amortization, helps evaluate a business's core profitability. EBITDA is short for earnings before interest, taxes, depreciation and amortization.
Operating income is an important metric because it shows your company's ability to generate profits from its operational activities. As a business owner, you can use this data to measure the operational successes of your business and get an insight into what you need to improve.
Operating income is revenue less any operating expenses, while net income is operating income less any other non-operating expenses, such as interest and taxes. Operating expenses include selling, general & administrative expenses (SG&A), and depreciation and amortization.
One is not necessarily better than the other since each is designed to measure something different. EBITDA strips interest, taxes, depreciation, and amortization from operating income, while gross profit strips the cost of labor and materials from revenue. JCPenney.
Often abbreviated as OpEx, operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, step costs, and funds allocated for research and development.
To calculate net operating income, subtract operating expenses from the revenue generated by a property. Revenue from real estate includes rental income, parking fees, service changes, vending machines, laundry machines, and so on.
The operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company's operating income by its net sales.
DIFFERENCE IS TAXES: Operating income does NOT include taxes and net income does include taxes!!!!! Define contribution margin, contribution margin per unit, and contribution margin percentage.
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