Difference between Operating Income and Net Income

Operating Income

Operating income is defined as the profit of a company after deducting the operating expenses, which include the costs of running its everyday operations. Operating income, which is also synonymous with the operating profit, allows the analysts and the investors to help see the company’s operating performance. These expenses include general, administrative, selling, depreciation as well as amortisation, along with the other operating expenses.

The operating income excludes several items like the investments in other firms (also known as the non-operating income), interest expenses and taxes. Also, the non-recurring items like the cash paid in lieu of a lawsuit settlement are also not included in the operating income. It is calculated by subtracting the operating expenses from the gross profit of a company. The gross profit is defined as the total revenue minus the costs of goods sold for an organisation. It is extremely important to note that the operating income of a company helps the stakeholders determine the gross earnings from the operating and non-operating activities of a company.

Net Income

Net income is defined as the actual profits or earnings of a company. The net income is also referred to as the bottom line as it sits at the bottom of an income statement, and it is defined as the income that remains after factoring in the total expenses, additional income streams, debts and operating costs of running a company. The bottom line is also known as the net income of a firm on the income statement.

The net income is calculated by the process of netting out several items from operating income which include interest, depreciation, taxes and other expenses. Sometimes the additional income streams also end up in adding to the earnings like the interest on investments or the proceeds from the sale of the assets of a firm.

In short, the net income of a firm is defined as the profit after all the expenses get deducted from the revenues. The expenses include general and administrative costs, interest on loans, income taxes and other operating expenses such as utilities, rent, and payroll.

Difference between Operating Income and Net Income

It is important to understand that both operating income and net income are extremely important to estimate the short term and long term profitability of a firm. The stakeholders need to be aware of these figures to gauge the direction of the company. There are some major areas of difference between operating income and net income, and we should focus on them below to get a better understanding of the topic:

Operating Income

Net Income

Definition

Operating income is defined as the company’s profit after deducting the operating expenses, which are the costs of running its everyday operations.

Net income of a company is defined as the income that remains after factoring in all the debts, expenses, additional income streams and the operating costs. It is also known as its bottom line because it sits at the bottom of the income statement.

Formula

The formula for operating income is as follows:

Operating Income = Gross Income – (COGS + Operating Expenses + Depreciation and Amortisation)

The formula for operating income is as follows:

Net Income = Operating Income + (Investment Income – Interest Expense) + (Extraordinary Income – Extraordinary Expenses) – Taxes

Significance

The operating income helps to identify the proportion of revenue that actually gets transformed into profits. It helps to calculate the total return on capital employed.

The net income helps to identify the actual earning potential for any business. It is also used to calculate the ratios like earnings per share, return on equity, return on assets, etc.

Taxes

Taxes are not considered while calculating the operating income.

Taxes are considered while calculating the net income.

Components

The main components of operating income include expenses like depreciation and amortisation, selling expenses, administrative expenses and general expenses.

The main components of net income can also include the additional income like the sale of assets or interest income.

Conclusion

There are a number of points of difference between operating income and net income. Both operating income and net income display the income that is earned by a company. However, the two represent distinctly separate ways of expressing an organisation’s earnings. Both these metrics have their advantages, but they also have different methods involved in the calculations. It is in the final analysis of these two numbers that the investors will determine where in the final process any company has started to earn a profit or suffer a loss.

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