Operating Income

Posted in Finance, Accounting and Economics Terms, Total Reads: 283
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Definition: Operating Income

Operating income is a difference between the Profit and operating expenses, and gives the measure of performance and efficiency of a company. Operating expenses includes labour cost, COGS, Utilities, office supplies and depreciation. Operating expenses does not taxes, investment of company, interest expenses. It also does not include expenses incurred in legal cases.

Higher operating income indicates more profitability of company. If the operating income is high, they can invest for expansion of company, investment in other companies or to increase their reserve. It can help to pay dividends and high salary for employees. It helps to retain best talent and increase shareholder wealth.

For the purpose of valuation of company, the comparison of company between the peer companies/same industry is taken.

Example:

Profit: $300,000

Cost of goods sold: $100,000

Rent: $10,000

Wages: $20,000

Utilities: $1000

Interest: $1000

Income Tax: $15,000

Hence, total operating expenses are $131,000. This is excluding the interest and income taxes.

Therefore, operating income = profit – operating expenses = $300,000- $131,000 = $169,000

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