Financial Glossary
Operating income
Operating income (also called operating profit or EBIT -- earnings before interest and taxes) is the profit remaining after subtracting cost of goods sold and all operating expenses (salaries, rent, depreciation, marketing, general and administrative costs) from revenue. The formula is: Operating Income = Gross Profit minus Operating Expenses. It explicitly excludes interest expense, income taxes, and non-operating items such as gains or losses on asset sales. Operating income measures the profitability of the core business independent of how it is financed or what tax jurisdiction it operates in, making it the standard basis for comparing performance across companies and for EBITDA-based valuation multiples.
Problem & Application
A marina generates $1,200,000 in annual revenue. Cost of goods sold (fuel, boat supplies) is $300,000, leaving gross profit of $900,000. Operating expenses -- dock staff wages, maintenance, insurance, and depreciation on equipment -- total $550,000. Operating income = $900,000 minus $550,000 = $350,000. After subtracting $80,000 in interest on a floating dock loan, pre-tax income is $270,000. Lenders and buyers focus on the $350,000 operating income figure (or its EBITDA equivalent adding back $50,000 depreciation = $400,000 EBITDA) for underwriting and valuation purposes, because it reflects the business's true earning power before owner-specific financing choices distort the picture.
In Short
Operating income is a key measure of business performance, highlighting how well a company’s core operations are performing without external financial influences.