Operating Income vs. Net Income: What's the Difference? (original) (raw)

Operating Income vs. Net Income: An Overview

Operating income and net income both show the income earned by a company, but the two represent distinctly different ways of expressing a company's earnings. Both metrics have their merits but also have different deductions and credits involved in their calculations. It's in the analysis of the two numbers that investors can determine where in the process a company began earning a profit or suffering a loss.

Key Takeaways

• Operating income is revenue less any operating expenses, while net income is operating income less any other non-operating expenses, such as interest and taxes.
• Operating expenses include selling, general & administrative expenses (SG&A), and depreciation and amortization.
• Net income (also called the bottom line) can include additional income like interest income or the sale of assets.

Operating Income

Operating income is a company's profit after deducting operating expenses which are the costs of running the day-to-day operations. Operating income, which is synonymous with operating profit, allows analysts and investors to drill down to see a company's operating performance by stripping out interest and taxes.

Operating expenses include selling, general & administrative expenses (SG&A), depreciation and amortization, and other operating expenses. Operating income excludes items such as investments in other firms (non-operating income), taxes, and interest expenses.

Also, nonrecurring items such as cash paid for a lawsuit settlement are not included. Operating income is also calculated by subtracting operating expenses from gross profit. Gross profit is total revenue minus costs of goods sold (COGS).

Net Income

Net Income is a company's profits or earnings. Net income is referred to as the bottom line since it sits at the bottom of the income statement and is the income remaining after factoring in all expenses, debts, additional income streams, and operating costs. The bottom line is also referred to as net income on the income statement.

Net income is calculated by netting out items from operating income that include depreciation, interest, taxes, and other expenses. Sometimes, additional income streams add to earnings like interest on investments or proceeds from the sale of assets.

In short, net income is the profit after all expenses have been deducted from revenues. Expenses can include interest on loans, general and administrative costs, income taxes, and operating expenses such as rent, utilities, and payroll.

When comparing companies as an investment, it's important to look at these metrics in regard to the specific industry in which they operate. An operating income that may be considered "bad" in one industry might be acceptable in another.

Operating Income vs. Net Income Example

Below is the 2023 income statement for Macy's as reported in its 2023 annual report.

• Total revenue was $23.9 billion. It includes net sales and other revenue.
• Operating income was $382 million and included all the expenses associated with operating for the year, including cost of sales, selling, general, and administrative expenses, and impairment; restructuring and other costs.
• Net income was $105 million, which takes into consideration settlement charges, interest expense, and taxes.

You'll notice that Macy's earned 382millioninoperatingincomewhileearning382 million in operating income while earning 382millioninoperatingincomewhileearning23.9 billion in total revenue. The company's high cost of sales ($14 billion) and SG&A ($8.4 billion) took a big chunk out of revenue. After deducting settlement charges, interest expenses, and taxes, the company was able to end the year with a net income of $105 million.

Operating income and net income show income for companies; however, it's important to analyze all areas of a company's financial statements to determine where a company is making money or losing money.

How Do You Calculate Operating Income?

Operating income is calculated as total revenues minus operating expenses. Operating expenses can vary for a company but generally include cost of goods sold, selling, general, and administrative expenses, payroll, and utilities.

Is Operating Income the Same as EBIT?

Operating income is often used interchangeably with earnings before interest and taxes (EBIT). Though they are similar, there are notable differences. The main difference is that operating income does not include non-operating expenses or income, such as interest income. The differences will depend on the specific company.

Is Net Income Also Gross Profit?

No, net income is not gross profit. Net income is the amount of money left from revenues after all expenses have been deducted, including cost of goods sold, interest, and taxes. Gross profit is revenue minus operating expenses, such as cost of goods sold and SG&A, and no other expenses.

The Bottom Line

Operating income and net income both provide insight into the profitability of a company at different stages of the business. Operating income is a company's income after operating expenses have been deducted from revenue, which shows how well a company is doing from its core business. Net income is a company's operating income after other expenses, such as taxes and interest expenses, are deducted.