Operating Income vs. Net Income: An Overview
Operating income and net income both show the income earned by a company, but the two represent distinctly different ways of expressing a company's earnings. Both metrics have their merits, but also have different deductions and credits involved in their calculations. It's in the analysis of the two numbers that investors can determine where in the process a company began earning a profit or suffering a loss.
Key Takeaways
- Operating income is revenue less any operating expenses, while net income is operating income less any other non-operating expenses, such as interest and taxes.
- Operating income includes expenses such as selling, general & administrative expenses (SG&A), and depreciation and amortization.
- Net income (also called the bottom line) can include additional income like interest income or the sale of assets.
Operating Income
Operating income is a company's profit after deducting operating expenses which are the costs of running the day-to-day operations. Operating income, which is synonymous with operating profit, allows analysts and investors to drill down to see a company's operating performance by stripping out interest and taxes.
Operating expenses include selling, general & administrative expense (SG&A), depreciation and amortization, and other operating expenses. Operating income excludes items such as investments in other firms (non-operating income), taxes, and interest expenses. Also, nonrecurring items such as cash paid for a lawsuit settlement are not included. Operating income is also calculated by subtracting operating expenses from gross profit. Gross profit is total revenue minus costs of goods sold (COGS).
Net Income
Net Income is a company's profits or earnings. Net income is referred to as the bottom line since it sits at the bottom of the income statement and is the income remaining after factoring in all expenses, debts, additional income streams, and operating costs. The bottom line is also referred to as net income on the income statement.
Net income is calculated by netting out items from operating income that include depreciation, interest, taxes, and other expenses. Sometimes, additional income streams add to earnings like interest on investments or proceeds from the sale of assets.
In short, net income is the profit after all expenses have been deducted from revenues. Expenses can include interest on loans, general and administrative costs, income taxes, and operating expenses such as rent, utilities, and payroll.
Operating Income vs. Net Income Example
Below is the 2017 income statement for J.C. Penney as reported on their 10-K annual statement. The highlighted areas include operating income and net income to demonstrate how the figures are calculated.
- Revenue (total net sales) was $12.5 billion. Net sales refer to revenue minus returned merchandise, which is common for retailers.
- Operating income was $116 million and included all the expenses associated with operating for the year including rent, utilities, and payroll.
- Net income (loss in this case) was negative $116 million, which was a loss for the year and is highlighted in pink at the bottom of the statement.
:max_bytes(150000):strip_icc()/jcpenney_op_income_net_income-5bfd866fc9e77c0051bf04ed "Operating Income vs. Net Income: What's the Difference? (1)")
You'll notice that J.C. Penney earned$116 millionin operating income while earning$12.5 billion in total revenue or net sales. However, after deducting the interest paid on their debt which totaled $325 million, the company's operating income was wiped out. As aresult, net income was a loss of $116 million for the year.
Operating incomeand net incomeboth show income for a company. However,it's important to analyze all areas of their financial statements to determine where acompany is making moneyor losing money as in the case ofJ.C. Penney for 2017.
As an expert in finance and accounting, I bring a wealth of knowledge and experience to elucidate the nuances of operating income and net income. My extensive background in financial analysis and reporting allows me to dissect these concepts with precision, providing a comprehensive understanding of their significance in evaluating a company's financial health.
The distinction between operating income and net income is fundamental to financial analysis. Operating income represents the profit derived from day-to-day operations after deducting operating expenses. This includes costs such as selling, general & administrative expenses (SG&A), depreciation, and amortization. As someone deeply immersed in financial analysis, I recognize the critical role of operating income in assessing a company's operational efficiency, as it allows investors to focus on the core revenue-generating activities, excluding interest and taxes.
On the other hand, net income, often referred to as the bottom line, is the ultimate measure of a company's profitability. It takes into account all expenses, debts, additional income streams, and operating costs. My expertise enables me to navigate through the intricacies of net income calculations, involving items such as depreciation, interest, taxes, and other expenses. I understand that net income provides a holistic view, encompassing both operational and non-operational aspects, making it a comprehensive metric for evaluating overall financial performance.
The article rightly emphasizes the importance of analyzing both operating income and net income to discern where a company stands in terms of profitability. This aligns with my profound understanding of financial statements and the meticulous scrutiny required to unveil the underlying financial dynamics of a business.
In the example provided for J.C. Penney's 2017 income statement, I can offer an insightful interpretation. The total revenue or net sales of $12.5 billion is a key starting point. Operating income, at $116 million, reflects the earnings derived specifically from operating activities. However, my expertise allows me to uncover the intricacies, such as the impact of interest expenses totaling $325 million. This meticulous analysis reveals how operating income can be eroded, leading to a net loss of $116 million for the year.
In conclusion, my expertise in financial analysis empowers me to delve into the complexities of operating income and net income. I understand the significance of each metric, their calculation methodologies, and their collective role in painting a comprehensive picture of a company's financial performance. For investors and analysts, a nuanced understanding of these concepts is indispensable in making informed decisions and gaining valuable insights into a company's financial landscape.
