Financial Statement Analysis

- Ratio Analysis of Financial Statements (Formula, Types, Excel)
- Ratio Analysis Advantages
- Ratio Analysis
- Liquidity Ratios
- Cash Ratio
- Cash Ratio Formula
- Quick Ratio
- Quick Ratio Formula
- Current Ratio
- Current Ratio Formula
- Acid Test Ratio Formula
- Defensive Interval Ratio
- Working Capital Ratio
- Working Capital Formula
- Net Working Capital Formula
- Changes in Net Working Capital
- Cash Flow from Operations Ratio
- Cash Reserve Ratio
- Operating Cycle Formula
- Current Ratio vs Quick Ratio
- Bid Ask Spread
- Liquidity vs Solvency
- Liquidity
- Solvency
- Solvency Ratios
- Equity Ratio
- Capital Adequacy Ratio
- Liquidity Risk
- Altman Z Score

- Turnover Ratios
- Inventory Turnover Ratio
- Accounts Receivable Turnover
- Accounts Receivables Turnover Ratio
- Accounts Payable Turnover Ratio
- Days Inventory Outstanding
- Days in Inventory
- Days Sales Outstanding
- Average Collection Period
- Days Payable Outstanding
- Cash Conversion Cycle
- Cash Conversion Cycle (CCC) Formula
- Fixed Asset Turnover Ratio Formula
- Debtor Days Formula
- Working Capital Turnover Ratio

- Profitability Ratios
- Profitability Ratios Formula
- Common Size Income Statement
- Vertical Analysis of Income Statement
- Profit Margin
- Gross Profit Margin Formula
- Gross Profit Percentage
- Operating Profit Margin Formula
- EBIT Margin Formula
- Operating Income Formula
- Net Profit Margin Formula
- EBIDTA Margin
- Degree of Operating Leverage Formula (DOL)
- NOPAT Formula
- OIBDA
- Earnings Per Share
- Basic EPS
- Diluted EPS
- Basic EPS vs Diluted EPS
- Return on Equity (ROE)
- Return on Capital Employed (ROCE)
- Return on Invested Capital (ROIC)
- Return on Sales
- ROIC Formula (Return on Invested Capital)
- Return on Investment Formula (ROI)
- ROIC vs ROCE
- ROE vs ROA
- CFROI
- Cash on Cash Return
- Return on Total Assets (ROA)
- Return on Average Capital Employed
- Capital employed Employed
- Return on Average Assets (ROAA)
- Return on Average Equity (ROAE)
- Return on Assets Formula
- Return on Equity Formula
- DuPont Formula
- Net Interest Margin Formula
- Earnings Per Share Formula
- Diluted EPS Formula
- Contribution Margin Formula
- Unit Contribution Margin
- Revenue Per Employee Ratio
- Operating Leverage
- EBIT vs EBITDA
- EBITDAR
- Capital Gains Yield
- Tax Equivalent Yield
- LTM Revenue
- Operating Expense Ratio Formula
- Overhead Ratio Formula
- Variable Costing Formula
- Capitalization Rate
- Cap Rate Formula
- Comparative Income Statement
- Capacity Utilization Rate Formula
- Total Expense Ratio Formula

- Efficiency Ratios
- Dividend Ratios
- Debt Ratios
- Debt to Equity Ratio
- Debt Coverage Ratio
- Debt Ratio
- Debt to Asset Ratio Formula
- Coverage Ratio
- Coverage Ratio Formula
- Debt to Income Ratio Formula (DTI)
- Capital Gearing Ratio
- Capitalization Ratio
- Interest Coverage Ratio
- Times Interest Earned Ratio
- Debt Service Coverage Ratio (DSCR)
- DSCR Formula (Debt service coverage ratio)
- Financial Leverage Ratio
- Financial Leverage Formula
- Degree of Financial Leverage Formula
- Net Debt Formula
- Leverage Ratios
- Leverage Ratios Formula
- Operating Leverage vs Financial Leverage
- Current Yield
- Debt Yield Ratio
- Solvency Ratio Formula

**Table of Contents**

## What is Operating Income Formula?

Operating income Formula (also referred to as EBIT formula) is a profitability formula that helps in the calculation of a company’s profits generated from core operations. The formula is a decision tool for an investor to calculate how much gross income will eventually result in profit for a company. The operating income can be calculated by deducting the cost of goods sold and operating expenses from total revenue.

Mathematically, Operating Income Formula can be calculated using two methods

#### Method 1

**Operating Income Formula = Total Revenue – Cost of Goods Sold – Operating Expenses**

#### Method 2

Alternatively, the Formula for operating income can also be calculated by adding back interest expense and taxes to the net income (adjusted for non-operating income and expense) which is mathematically represented as,

**Operating Income = Net Income + Interest Expense + Taxes**

### Steps to Calculate Operating Income Formula

#### Method 1

For the first method the Operating Income formula can be calculated in the following four simple steps:

**Step 1:** Firstly, the total revenue has to be noted from the profit and loss account. For example, in a manufacturing company, the total revenue will be computed by multiplying the number of units produced with the average price per unit.

**Total Revenue = Number of Units Produced * Average Price Per Unit**

**Step 2:** Now, the cost of goods sold is also available in the profit and loss account. It is calculated by adding the raw material purchase during the accounting period to the beginning inventory and then deducting the closing inventory.

**Cost of Goods Sold = ****Beginning inventory + Purchase of raw material – Closing inventory**

**Step 3:** Now, the operating expenses are also gathered from the profit and loss account. It includes various direct and indirect costs like labor cost, depreciation, administrative expenses etc.

**Step 4:** Finally, the EBIT is arrived at by deducting the values derived in Step 2 and Step 3 from the value in Step 1 as shown below.

**EBIT = Total revenue – Cost of goods sold – Operating expenses**

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#### Method 2

On the other hand, the following four steps help in the calculation of the Operating Income formula by using the alternate method:

**Step 1:** Firstly, the net income has to be captured which is easily available in the profit and loss account as a line item. Make sure that non-operating income (deducted) and expense (added back) has been adjusted as these are not part of the core operation.

**Step 2:** Now, the interest expense is also available in the profit and loss account. It is the product of the effective rate of interest and outstanding borrowing across the year.

**Step 3:** Now, the taxes are also collected from the profit and loss account.

**Step 4: **Finally, the EBIT is derived by adding back the values derived in Step 2 and Step 3 to the value in Step 1 as shown below.

**EBIT = Net income + Interest expense + Taxes**

**Examples of Operating Income Formula**

Let’s see some simple to advanced examples of EBIT to understand it better.

#### Example #1

Let us consider an example to calculate EBIT for a company called ABC Limited which is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, the company has generated $150,000 in total revenue along with the following expenses.

In below-given Screenshot is the data used for the Calculation of Operating Income

For the calculation of Operating Income, we will use the following values first.

**Cost of Goods Sold**

**Net Income**

Therefore, Net income = $41,000

ABC Limited’s net income at the end of the financial year stood at $41,000.

Now, Using the first method to calculate Operating Income is as follows –

i.e. EBIT = $150,000 – $70,000 – $25,000

**EBIT will be –**

So, EBIT = $55,000

Now, we will do the calculation of Operating Income using the second method mentioned above.

i.e. EBIT = $41,000 + $10,000 + $4,000

**EBIT will be –**

So, EBIT = $55,000

#### Operating Income Formula – Example #2 (Apple Inc)

Let us take the real-life example of Apple Inc.’s annual report as on September 29, 2018. The following information is available:

The calculation of Operating Income will be as follows –

Therefore,

- EBIT (in Millions) = Net income + Interest expense + Tax – Non-Oper. Income
- EBIT = $59,531 + $3,240 + $13,372

**Operating Income Formula will be –**

- EBIT = $70,898

### Operating Income Formula Calculator

You can use the following EBIT Calculator.

Total Revenue | |

Cost of Goods Sold | |

Operating Expenses | |

Operating Income Formula = | |

Operating Income Formula = | Total Revenue - Cost of Goods Sold - Operating Expenses | |

0 - 0 - 0 = | 0 |

### Relevance and Use of Operating Income Formula

EBIT is basically a profitability metric that helps to assess how a company is performing which is calculated by measuring profit before payment of interest to lenders or creditors and taxes to the government. This is a profitability calculation which is measured in terms of dollars and not in percentages like most other financial terms.

However, there remains a limitation of the operating income formula that it is particularly useful when comparing similar companies in the same industry. Since the EBIT formula only measures profit in terms of dollar amount, investors and other financial users usually find it difficult to use this metric to compare differently sized (small & medium enterprise, mid-corporate and large corporate) companies across the industry.

### Operating Income Formula in Excel (with template)

Now let us take the real-life example of Apple Inc.’s published financial statement for the last three accounting periods. Based on publicly available financial information the EBIT (in dollar terms) of Apple Inc. can be calculated for the accounting years 2016 to 2018.

In below-given screenshot is the data for the calculation of EBIT using both the formula mentioned above.

**Calculation of Operating Income using the first formula.**

EBIT = Total revenue – Cost of goods sold – Operating expenses

**So EBIT for Sep 29, 2018, will be –**

Similarly, we will calculate the EBIT for Sep 30, 2017, and Sep 24, 2016

**Calculation of Operating Income using the Second formula.**

EBIT = Net income + Interest expense + Taxes

**So the Income for Sep 29, 2018, will be –**

Similarly, we will calculate the EBIT for Sep 30, 2017, and Sep 24, 2016

From the above table, it can be seen that the EBIT of Apple Inc. in dollar terms has been growing during the period which is a positive sign for the company.

### Recommended Articles

This has been a guide to Operating Income Formula. Here we discuss how to calculate Operating Income using practical examples along with downloadable excel templates. You may learn more about Financial Analysis from the following articles –

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