More of this Feature • Introduction • Income Statement • Revenue / sales • Cost of Goods Sold • Gross profit • Gross margin • The first three lines • Operating Expenses • R&D Expense • SG&A Expense • Goodwill Charges • Extraordinary Events • Accounting for extraordinary events • Oper. income/margin • Interest income and expense • Interest coverage ratio • Depreciation expense • Accum. Depreciation • Straight-line Method • Accelerated and Sum of the Years' Digits Method • Dbl Declining Balance • Comparing Depr. Mths • EBITDA • Income taxes • Minority Interests - cost, equity, and consolidated methods • Unreported earnings • Continuing operations • Accounting changes • Preferred dividends • Net income applicable to common shares • Net profit margin • Basic vs. Diluted EPS • Hiding share dilution • Share repurchases • Return on Equity- ROE • Asset turnover • Return on Assets- ROA • Projecting earnings • Formulas & Calculations • Putting it together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

From Other Guides • The Bottom Line: Profit and Profit Margins • Operating Margin and Gross Margin

Elsewhere on the Web • Operating Income • Operating Margin • The Importance of Profit Margins

Operating Income
Operating income, or operating profit, is a measurement of the money a company generated from its own operations [it doesn’t include income from investments in other businesses, for instance]. Operating income can be used to gauge the general health of the core business or businesses.

Operating Income = gross profit – operating expenses

The operating income figure is tremendously important because it is required to calculate the interest coverage ratio and the operating margin

Operating Margin [or Operating Profit Margin]
The operating margin is another measurement of management’s efficiency. It compares the quality of a company’s operations to its competitors. A business that has a higher operating margin than its industry’s average tends to have lower fixed costs and a better gross margin, which gives management more flexibility in determining prices. This pricing flexibility provides an added measure of safety during tough economic times.

To calculate the operating margin, divide operating income by the total revenue.

Operating income
----------(divided by)----------
Total revenue

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