Updated July 28, 2023
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 costs. 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. Multiple formulas to calculate operating income depend 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 the company’s direct and indirect costs are available.
- Operating income is gross income minus depreciation minus operating expense minus amortization. This formula applies when the value of gross profit operating expense, depreciation, and amortization are available.
- Operating income is the sum of net earnings, interest expense, and taxes. This formula is used when the company’s net earnings are available, along with interest expenses and the tax levied on the company and paid by 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 is $2,000, and the indirect cost is $3000. Now, we have to calculate the Operating Income.
Solution:
The formula to calculate Operating Income is as 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:
The formula to calculate Operating income is as 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.
Solution:
The formula to calculate Operating income is as 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:
The formula to calculate Operating income is as 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 the three-year income statements.
Solution:
The formula to calculate Operating income is as 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
The formula to calculate Earnings Per Share is as 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, taxes are added in some formulas where operating expense is used. In contrast, in another formula where gross profit is used, operating expense is deducted from gross profit along with the 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 or indirect costs resulting in operating income.
Relevance and Uses of Operating Income Formula
There are many uses for 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
| Total Revenue | |
| Direct Costs | |
| Indirect Cost | |
| Operating Income Formula | |
| Operating Income Formula = | Total Revenue - Direct Costs - Indirect Cost | |
| 0 - 0 - 0 = | 0 |
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 are 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 –
