Operating income is one of the most important aspects to consider when reviewing a business. But, what exactly is operating income? Operating income is the profit that is generated before taxes from its operations. It is also sometimes called operating profit. It is the monies that are available to the owners in the company before things like preferred stock dividends and income taxes are to be paid.
Why is it such an important figure in a business? Looking at a company’s operating income is important because it can give you insight into the overall health of a company. The reason is also quite simple. If a company does not have a lot of assets to sell off then any money that flows into the company will have to be generated from the sales of products or services. This is what will make up the operating income. And, this money will eventually makes its way to the company’s shareholders.
So, if a company’s operating income goes down there is less money to go around for owners, expansion of the business, debt reduction or any other goals management has set forth for the business. Therefore, watching a company’s operating income is something lenders and shareholders do frequently in order to judge the vitality of a company. Operating income is also used to calculate interest coverage ratio and also the operating margin.
You can calculate operating income by taking all of the gross profit and subtracting operating expenses.