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 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 expenses (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
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.
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.
Net operating income is gross operating income minus operating expenses. Gross operating income is total rent plus any other related income, such as fees for parking and vending machines. Operating expenses include property taxes and insurance, building management, maintenance, and utilities.
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. Contribution-margin percentage= contribution margin per unit/selling price.
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.
Operating income—also called income from operations—takes a company's gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses. A business's operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities.
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.
The operating income excludes several items like the investments in other firms (also known as the non-operating income), interest expenses and taxes. Also, the non-recurring items like the cash paid in lieu of a lawsuit settlement are also not included in the operating income.
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. Operating income reflects the profitability of a company's core business and does not account for extraordinary income or expenses.
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.
Operating income excludes taxes and interest expenses, which is why it's often referred to as EBIT. However, there are times when operating income can differ from EBIT.
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.
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.
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—also called income from operations—takes a company's gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses. A business's operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities.
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. Operating income reflects the profitability of a company's core business and does not account for extraordinary income or expenses.
If your total expenses are more than your revenues, you have a negative net income, also known as a net loss. Using the formula above, you can find your company's net income for any given period: annual, quarterly, or monthly—whichever timeframe works for your business.
EBIT completely ignores or “adds back” Interest, Taxes, and Non-Core Business Income. EBITDA is the same.But Net Income is the opposite – it deducts Interest and Taxes, adds Non-Core Income, and subtracts Non-Core Expenses.
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