Operating Income or Earnings Before Interest & Tax (EBIT) is an important profit measurement tool that gives insight into a company's operating performance. It doesn’t include non-operating gains or losses, the impact of financial leverage, or tax expenses incurred by the business. It is calculated as Gross Profit less Operating Expenses.
Suppose Vareto earns sales revenue of $350,000, its Cost of goods sold was $50,000, rent cost was $15,000, and compensation expenses were $58,000. Operating Expense = 58,000+15,000 = $73,000. Operating Income = sales revenue less (operating expense + COGS) = 350,000 - (73,000 + 50,000) = $227,000.
Why it matters
Operating income reflects the operating efficiency of the business. Stakeholders and investors calculate the operating income margin of companies to compare their operational efficiency.