Operating income and revenue both show the money that a company makes. However, the two numbers are different ways of expressing a company’s earnings, and they have different deductions and credits involved in their calculations. The main difference is that revenue is a company’s income before deducting expenses, while operating income represents the profit after subtracting expenses.
Nevertheless, both revenue and operating income are essential in analyzing whether a company is performing well. Here’s a closer look at each of these terms.
Key Takeaways
- Revenueis the total amount of income generated by a company from the sale of its goods or services beforeany expenses are deducted.
- Operating incomeis the sum total of a company’s profitafter subtracting its regular, recurring costs and expenses.
- The disparity between these two figures can be an important barometer of a company’s financial health.
What Is Revenue?
Revenueis the total amount of income that a company generates from the sale of goods and services. It refers to the sum generated before deducting any expenses, such as those involved in running the business.
Revenueis often calledthe top line because it’s locatedat the topof anincome statement. When a company is said to have“top-line growth,” it means the company’s revenue—the money it’s taking in—is growing.
Revenue is also often referred to as net sales. Technically, net sales refer to revenue minus any returns of purchased merchandise.
Revenue or net sales refer only to business-related income (the equivalent of earned income for an individual). If a company has other sources ofincome—for example, from investments—that income is not considered revenue since it wasn’t the result ofthe primary income-generating activity. Any such additional income is accounted for separately on balance sheets and financial statements.
Operating Revenue
Operating revenue is revenue earned from a business’s main activities, whether selling goods or services. For example, a bakery’s operating revenue comes from selling baked goods. An electrician’s operating revenue comes from providing electrical services. Apple’s revenue comes from iPhones, iMacs, and other devices and services sold by the company.
Nonoperating Revenue
Nonoperating revenue is the money that a business earns from side activities unrelated to its daily activities, such as profits from investments or dividend income. This type of revenue is generally less consistent than operating revenue.
What Is Operating Income?
If revenue refers to earnings before subtracting any costs or expenses, then operating income, by contrast,is a company’s profitafter subtractingoperating expenses, which are the costs of running the daily business. Operating income helpsinvestors separate out the earnings for the company’s operating performance by excludinginterest and taxes.
Operating expenses include , depreciation, and amortization. Operating income does not include money earned from investments in other companies or nonoperating income, taxes, and interest expenses. Also excluded are any special or nonrecurring items, such as acquisition expenses, proceeds from the sale of a property, or cash paid for a lawsuit settlement.
How to Calculate Operating Income
Operating income is often used interchangeably with earnings before interest and taxes (EBIT). However, there is a slight difference between the two: Operating income equals revenue minus operating expenses, while EBIT also subtracts the cost of goods sold (COGS). Here are the basic formulas:
Operating income = revenue - operating expenses
EBIT = revenue - operating expenses - COGS
Direct costs are expenses specifically related to the cost of producing goods and services—things like parts, raw materials, utility bills, direct labor, and commissions or professional fees. Indirect costs are expenses that aren’t directly related to manufacturing or buying goods for resale. Examples include salaries and benefits, factory equipment (depreciation and maintenance), rent, and certain utilities.
Real-Life Example of Revenue andOperating Income
A company’s revenue and its operating income can end up as two very different numbers.
Below is an example where operating income and revenue are highlighted to illustrate the differences between the two figures. Theincome statement is for JCPenney as of the end of2017 asreported on its 10-K annualstatement. Note that the company’s:
- Total revenue and total net saleswere the same. Net sales amount to revenue minus returned merchandise, which is common for retailers.
- Operating income is located farther down the statement after deducting expenses associated with operating for the year. The expenses included the cost of goods sold (COGS) of $8.1 billion andSG&A expenses,or costs not directly tied to production,of $3.4 billion for a totalof $12.39 billion (highlighted in red), producing the $116 million in operating income.
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To sum up: JCPenney earned$12.5 billion in total revenue, and after expenses were taken into account, it had$116 millionin operating income. On the face of it, the $12.5 billion inrevenue appearsimpressive, but when factoring in expenses, the majority of which were from the cost of goods, operating income comes in at under 10% of total revenues. It’s also notable that netincome—the actual profit of the company, also known as the bottom line—is actually a negative $116 million.
In other words, JCPenney posteda yearly loss of $116 million after deducting the interest paid on its outstanding debt. Paying that debt put it in the red. Even so, the disparity between revenue and operating income is significant.
Simon Property Group (SPG) and Brookfield Asset Management (BAM) rescued JCPenney out of bankruptcy in the fall of 2020. The company restructured its debt and closed more than 200 stores. As of late 2022, it had about 670 stores while reporting low debt levels largely as a result of the restructuring.
Companies must factor in a number of expenses to run a business, and sometimes these costs exceed revenues, resulting in lower operating income and profit. When a company has healthy revenues and operating income, this results in stronger operating margins. However, what is considered a strong operating margin often varies across different industries.
What is not included in operating income?
Operating income does not take into consideration taxes, interest, financing charges, investment income, or one-off (nonrecurring) or special items, such as money paid to settle a lawsuit.
Is net operating income the same as net income?
Net operating income (NOI) and net income differ slightly. Net operating income is revenue minus all operating expenses. Conversely, net income is revenue minus all expenses, including operating expenses and nonoperating expenses, such as taxes.
Is earnings before interest and taxes (EBIT) the same as operating income?
Earnings before interest and taxes (EBIT) and operating income are sometimes used interchangeably, but they are not the same. While operating income equals revenue minus operating expenses, EBIT also subtracts the cost of goods sold (COGS).
The Bottom Line
As the JCPenney example illustrates, the difference between revenue and operating income shows why analyzing financial statements can be challenging. It’s always prudent (and recommended) to consider multiplemetrics to determine a company’s profitability before making any investment decisions.
