Operating income and revenue are important metrics that both reflect the amount of money a company makes. Although the two numbers are different ways of expressing a company’s earnings, and they include different deductions and credits in their calculations, revenue and operating income are important in analyzing whether a company is performing well. Both are necessary.
- Revenue is the total amount of income generated by a company for the sale of its goods or services. before this Any expenses are deducted.
- Operating income is the sum total of a company’s profits after subtracting 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?
Revenue is the total amount of income generated by a company for the sale of its goods or services. It refers to the amount generated before this Any expenses – such as those involved in running the business – are taken out. Revenue is often called the “top line” because it is located at the top of the income statement. So, when a company is said to have “top-line growth,” it means that the company’s revenue — the money it’s taking in — is increasing.
Revenue is also often referred to as net sales. Technically, net sales refers to any return of goods purchased minus revenue.
Revenue or net sales simply refers to the income related to the business (equal to the income earned for an individual). If the company has other sources of income from investments, for example, the income is not considered revenue because it was not a result of the primary business. Any additional income is accounted for separately on the balance sheet and financial statements.
What is operating income?
Revenue, as we said, refers to earnings before the subtraction of any costs or expenses. In contrast, operating income is the company’s profit after subtracting operating expenses, which are the cost of running a daily business. Operating income helps investors set aside income for a company’s operating performance, excluding interest and taxes.
Operating expenses include selling, general and administrative expenses (SG&A), depreciation and amortization. Operating income does not include money earned from investments in other companies or non-operating income, taxes and interest expenses. Also excludes: Any special or non-recurring items, such as cash payments to settle a lawsuit.
Operating income can also be calculated by subtracting operating expenses from gross profit; Gross gross profit is total revenue minus cost of goods sold (COGS).
Real life example of revenue and operating income
A company’s revenue and its operating income can end up as two dramatically different numbers.
Below is an example where operating income and revenue are highlighted to illustrate the difference between the two figures. The income statement is for J.C. Penney as of the end of 2017, as reported in its 10K annual statement. note that:
- Company’s total revenue or total net sales That was it. Returned merchandise after subtracting revenue from the net sales amount, which is common for retailers.
- operating income The details after deducting the operating expenses for the year are located at the bottom. Expenses include $8.1 billion and the cost of SG&A sales, or costs not directly linked to production, totaling $12.39 billion (highlighted in red) for a total of $3.4 billion to come with $116 million in operating income. For.
In short: J.C. Penney earned $116 million in operating income while generating $12.5 billion in total revenue. Alone, revenue of $12.5 billion initially appears impressive, but when expenses are taken into account, operating income was only $116 million. Also, you’ll notice that net income — the company’s actual profit, also known as the bottom line — is actually negative of $116 million.
In other words, J.C., Penney reported a loss of $116 million for the year after deducting the interest paid on its outstanding debt. It was paying off that debt that put it in the red. Still, the disparity between the revenue number and the operating income number is striking.
The contrast between these two figures shows why analyzing financial statements can be challenging. That’s why you need to consider several metrics in calculating the profitability of a company before investing. If you consider Penny’s revenue in 2017, it looks like it could take in $325 million in interest payments without a problem. But when you see how low its operating income is, you realize that this company could easily be burdened by its service obligations — something to consider before buying its stock.