metrics explained

Operating Income vs Net Income: What's the Difference?

Operating income and net income are two important measures of profitability. Here's a look at the key differences between the two.

Operating Income

Operating income is a measure of a company's profitability that excludes interest and taxes. It's also sometimes referred to as "operating profit" or "operating earnings."

To calculate operating income, you start with a company's gross profit. From there, you subtract operating expenses, which include things like selling, general, and administrative (SG&A) expenses. The result is a company's operating income.

Operating income is an important metric because it strips out the effects of financing and taxes, which can vary widely from one company to the next. This makes it a good measure for comparing the profitability of companies in different industries.

Net Income

Net income is a measure of a company's profitability that includes all income and expenses, including interest and taxes. It's also sometimes referred to as "net profit" or "net earnings."

To calculate net income, you start with a company's gross profit. From there, you add back in any interest and taxes paid. The result is a company's net income.

Net income is an important metric because it includes all income and expenses, which gives you a complete picture of a company's profitability. This makes it a good measure for comparing the profitability of companies in different industries.

Key Differences

The key difference between operating income and net income is that operating income excludes interest and taxes while net income includes them. This makes operating income a more accurate measure of a company's core profitability.

Another key difference is that operating income is typically reported on a per-share basis while net income is reported on a per-share basis. This makes it easier to compare the profitability of companies of different sizes.

Final Thoughts

Operating income and net income are two important measures of profitability. Operating income is a more accurate measure of a company's core profitability, while net income gives you a complete picture of a company's profitability.

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