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 expenses include 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
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 , 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
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.
When comparing companies as an investment, it's important to look at these metrics in regard to the specific industry in which they operate. An operating income that may be considered "bad" in one industry might be acceptable in another.
Below is the 2023 income statement for Macy's as reported in its 2023 annual report.
Total revenue was $23.9 billion. It includes net sales and other revenue.
Operating income was $382 million and included all the expenses associated with operating for the year, including cost of sales, selling, general, and administrative expenses, and impairment; restructuring and other costs.
Net income was $105 million, which takes into consideration settlement charges, interest expense, and taxes.
You'll notice that Macy's earned$382 millionin operating income while earning$23.9 billion in total revenue. The company's high cost of sales ($14 billion) and SG&A ($8.4 billion) took a big chunk out of revenue. After deducting settlement charges, interest expenses, and taxes, the company was able to end the year with a net income of $105 million.
Operating incomeand net income show income for companies; however,it's important to analyze all areas of a company's financial statements to determine where acompany is making moneyor losing money.
How Do You Calculate Operating Income?
Operating income is calculated as total revenues minus operating expenses. Operating expenses can vary for a company but generally include cost of goods sold, selling, general, and administrative expenses, payroll, and utilities.
Is Operating Income the Same as EBIT?
Operating income is often used interchangeably with earnings before interest and taxes (EBIT). Though they are similar, there are notable differences. The main difference is that operating income does not include non-operating expenses or income, such as interest income. The differences will depend on the specific company.
Is Net Income Also Gross Profit?
No, net income is not gross profit. Net income is the amount of money left from revenues after all expenses have been deducted, including cost of goods sold, interest, and taxes. Gross profit is revenue minus operating expenses, such as cost of goods sold and SG&A, and no other expenses.
The Bottom Line
Operating income and net income both provide insight into the profitability of a company at different stages of the business. Operating income is a company's income after operating expenses have been deducted from revenue, which shows how well a company is doing from its core business. Net income is a company's operating income after other expenses, such as taxes and interest expenses, are deducted.
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.
Distinguish between operating income and net income. Net income takes into account income taxes, whereas, operating income does not take income taxes into account. Define contribution margin, contribution margin per unit, and contribution margin percentage.
Yes, it can be. Provided that our indirect expenses (eg. Salary, rent, etc) accrued are lower than the indirect income realised (eg. Interest income, dividends received, etc).
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.
Generally, a 10% operating profit margin is considered an average performance, and a 20% margin is excellent. It's also important to pay attention to the level of interest payments from a company's debt.
Net income, also known as the bottom line, is just as its name implies. It is the remaining income—or revenues—after deducting expenses, taxes, and costs of goods sold (COGS). Operating cash flow (OCF) is the amount of cash generated from operations, and is calculated by subtracting operating expenses from revenue.
It's important to note that operating income is different than net income. Operating income includes expenses such as costs of goods sold and operating expenses. However, operating income does not include items such as other income, non-operating income, and non-operating expenses.
Net income is the amount of money you bring home after taxes and other deductions are taken out of your paycheck. For businesses, net income refers to the money that remains after business expenses have been paid.
What is a good restaurant COGS average? A good restaurant COGS average to aim for is between 30-35%. However, keep in mind that it's possible for some menu items to have a higher COGS percentage but bank more money, so it's important to also look at the dollar amount each item is bringing in.
It's because it doesn't include taxes or interest on loans. Operating profit is much more reliable since it's a true profit that an organisation has and can use instantly.
When operating margin is high, it means that the amount of operating profit generated on each dollar of revenue is high. This is a good indicator that a business has a high quality of earnings.
But net income shows the profit of the entire business, and operating profit indicates the profit of your business's operating activities. And it would be best if you analyzed both metrics to better understand your financial health.
Operating profit is a company's profit after all expenses are taken out except for the cost of debt, taxes, and certain one-off items. Net income is the profit remaining after all costs incurred in the period have been subtracted from revenue generated from sales.
Salaries and benefits of corporate managers and staff. Office supplies. Depreciation of office building, equipment, furniture, and fixtures. Office facility rent.
Net operating income is a key measure of profitability, primarily in the commercial real estate industry. Still, it's not the same as net income because it doesn't account for debt interest, income taxes, capital spending, or depreciation and amortization.
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.
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:max_bytes(150000):strip_icc()/Screenshot2024-05-17at12.11.27PM-5d42fd91c1bb4304968623d5a49cb72e.png "Operating Income vs. Net Income: What's the Difference? (1)")
