Operating Income Formula

Operating Income Formula (Table of Contents)

• Operating Income Formula
• Examples of Operating Income Formula (With Excel Template)
• Operating Income Formula Calculator

Operating Income Formula

Operating income is sales revenue minus operational direct and indirect cost. It is also known as operating profit or earnings before interest and taxes (EBIT). Operating income is a measure of profitability that is generated from operations. This profitability tells how much revenue will become profitable in a company. It indirectly measures the efficiency of a company. With the increase in operating income, the profitability of the company’s core business also increases. There are multiple formulas to calculate operating income depending on the available values of the different financial elements. They are as follows:

• Operating income is total revenue minus direct costs minus indirect costs. This formula is used when direct cost and indirect cost are available for the company.

Examples of Operating Income Formula (With Excel Template)

Let’s take an example to understand the calculation of the operating income formula in a better manner.

Example #1

A company has a total revenue of $15,000, the direct cost to the company is $2,000, and the indirect cost to the company is $3000. Now, we have to calculate the Operating Income.

Solution:

Operating Income is calculated using the formula given below:

Operating Income = Total Revenue – Direct Costs – Indirect Cost

• Operating Income = $15,000 – $2,000 – $3,000
• Operating Income = $10,000

So, the operating income of the company is $10,000.

Example #2

A company has a gross profit of $50,000 with an operating expense of $15,000, depreciation value of assets is $5,000, and amortization of $5,000. Calculate the value of operating income.

Solution:

Operating income is calculated using the formula given below:

Operating Income = Gross Profit – Operating Expenses – Depreciation – Amortization

• Operating Income = $50,000 – $15,000 – $5,000 – $5,000
• Operating Income = $25,000

So, the operating income of the company is $25,000.

Example #3

A company has net earnings of $100,000 with an interest expense of $15,000 and taxes of $20,000. Calculate the value of operating income.

Popular Course in this category

All in One Financial Analyst Bundle- 250+ Courses, 40+ Projects250+ Online Courses | 1000+ Hours | Verifiable Certificates | Lifetime Access
4.9 (3,296 ratings)

Course Price
₹7999 ₹125000
View Course

Related Courses

Finance for Non Finance Managers Course (7 Courses)Investment Banking Course (123 Courses, 25+ Projects)Financial Modelling Course (7 Courses, 14 Projects)

Solution:

Operating income is calculated using the formula given below:

Operating Income = Net Earnings + Interest Expense + Tax

• Operating Income = $100,000 + $15,000 + $20,000
• Operating Income = $135,000

So, the operating income of the company is $135,000.

Example #4

A company named BNL Pvt. Ltd wants to calculate its operating income for the last 3 years.

Below is an income statement of the company for three years to calculate the operating income.

Solution:

Operating income is calculated using the formula given below:

Operating Income = Gross Profit – Operating Expenses – Depreciation – Amortization

Here, Depreciation = 0 and Amortization = 0

For 2018

• Operating Income = $140,543 – $116,000
• Operating Income = $24,543

For 2017

• Operating Income = 121,468 – 98,820
• Operating Income = $22,648

For 2016

• Operating Income = 104,044 – 83,900
• Operating Income = $20,144

Example #5

A manufacturing company named KML Manufacturer Pvt. Ltd wants to study its income statement for three years and wants to know the operating income and EPS through it.

Below are three-year income statements.

Solution:

Operating income is calculated using the formula given below:

Operating Income = Gross Profit – Operating Expenses – Depreciation – Amortization

For 2018

• Operating Income = $2,400,000 – $285,000 – $100,000 – $70,000
• Operating Income = $1,945,000

For 2017

• Operating Income = $1,972,400 – $231,000 – $75,000 – $50,000
• Operating Income = $1,616,400

For 2016

• Operating Income = $1,712,000 – $185,000 – $60,000 – $40,000
• Operating Income = $1,427,000

Net Income is calculated using the formula given below:

Net Income = Income Before Income Taxes – Provision for Income Tax

For 2018

• Net Income = $1,895,000 – $189,500
• Net Income = $1,705,500

For 2017

• Net Income = $1,579,400 – $157,940
• Net Income = $1,421,460

For 2016

• Net Income in 2016 = $1,401,000– $140,100
• Net Income in 2016 = $1,260,900

Earnings Per Share are calculated using the formula given below:

Earnings per share = Net Income / Number of Shares

For 2018

• Earnings per share in 2018 = $1,705,500 / $100,000
• Earnings per share in 2018 = $17.06

For 2017

• Earnings per share = $1,421,460/ $100,000
• Earnings per share = $14.21

For 2016

• Earnings per share in 2016 = $1,260,900/ $100,000
• Earnings per share in 2016 = $12.61

Explanation of Operating Income Formula

The operating income is the gross profit or profit generated by the company minus operating expense which includes selling general and administrative expenses, amortization, depreciation of assets, rent, salary of employees, insurance, commission, postage expense, and supplies expense. Operating incomes do not include investment and non-operating income, taxes, and interest expenses. Hence, in some formulas where operating expense is used, taxes are added to the formula, while in another formula where gross profit is used, operating expense is deducted from gross profit along with deduction of amortization and depreciation of assets from gross profit which results in operating income. And total revenue minus company paid the cost which can be direct cost or indirect cost resulting in operating income.

Relevance and Uses of Operating Income Formula

There are many uses of operating income; they are as follows:

• Operating income is used to measure the efficiency of the company.
• It is used to find the profitability of the company.
• It shows the overall health of the company.
• Operating income helps in the decision-making of the company.
• It helps to calculate EPS value.

Operating Income Formula Calculator

You can use the following Operating Income Formula Calculator

Conclusion

Operating income tells us about the financial condition of a company. The Higher the operating income, the more profitable company will be and will be able to pay the debt of the company on time. Investors monitor operating income as it gives an idea of the future scalability of the company. But some companies’ management misuses this and does fraud by changing the value of revenue and delaying expenses which is against the GAAP principle of accounting.

Recommended Articles

This has been a guide to operating income formulas. Here we discuss how to calculate operating income along with practical examples. We also provide an operating income calculator with a downloadable excel template. You may also look at the following articles to learn more –

1. Guide To Net Income Formula
2. Example of Change in Net Working Capital Formula
3. Formula For Market Capitalization
4. Examples of Shareholders’ Equity Formula
5. How to Calculate Operating Ratio?