Wednesday, 18 January 2012

Operating Income

Operating Income Definition:
Earnings before interest and tax (EBIT), also know as operating income, define a measure of a company’s profit from ordinary operations, excluding interest and tax. EBIT is also called net operating income, operating profit, or net operating profit. It is calculated as revenues minus cost of goods sold (COGS) and other operating expenses.

Operating Income Explanation:
Operating income, explained as a measure of company operations, is one of the most common financial ratios used for valuing a company as a whole. It is very valuable, as well, as a measure of the success of a company from period to period. Additionally, it is the measure of the ability of a company to cover costs and make profit. Operating income ratios leaves out interest and taxes, so it does not serve as a net value of the wealth created from a business. More, it is a general tool used to evaluate the operating process and efficiency which ultimately lead to company profits. One of the overall advantages of using operating income (EBIT) over other financial ratios is in the simplicity and standardization of calculation; though interest and taxes play an important role in the financial health of a company they do not, generally, make or break the model for success. When evaluating operating income vs net income, ask whether you need a measurement of company operations as a whole or company operations as they lead to profit.

Operating Income Formula:
The operating income formula provides a simple calculation for evaluating common business models. Calculating this equation is fairly simple when one has three values: revenues, cost of goods sold, and operating expenses.

Operating Profit = Revenues – (COGS + Operating Expenses)

Source ---------> wikiCFO

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