Operating Income vs Net Income

Difference Between Operating Income vs Net Income

Both Operating income and net income are important metrics in the financial accounting statements. Operating income is the income generated by the day to day operations or in other terms the core activities of a business. It is calculated after deducting the cost of operations from the total sales.

Mathematically, it can be expressed as:

Net income is the bottom line. The final profit available for the shareholders after deducting interest expenses, any extraordinary income or expense and taxes.

Mathematically, it can be expressed as:

The above equation helps us identify the relationship between operating income and net income. Operating income, on one hand, identifies the income generated from the operating activities of the business, net income, on the other hand, quantifies any income generated by the business entity either from operations or from interests earned from investments or even an income generated by liquidating an asset.  Operating income is a subset of a bigger umbrella called Net income.

Operating Income vs Net Income Example

Consider the income statement of an ABC company.

Here operating income has been calculated by deducting the cost and expenses from the total sales. However, to calculate net income total expenses are deducted from total income and then tax is levied. Also, as illustrated net income is the bottom line and final number on the income statement as one follows the top-down approach. Operating income is just a subset used in calculating the net income.

Operating Income vs Net Income – Infographics

Here we provide you with the top 5 difference between Operating Income vs Net Income

Operating Income vs Net Income – Key Differences

The key differences between Operating Income vs Net Income are as follows –

#1 – Significance

Operating income is the most significant section in the income statement of any business unit. This is because it helps in identifying the income generated from the primary business activities of the firm. It does not consider any one-time expense or any one-time income. Hence it is free from any manipulations and gives a clear picture of the robustness of the operational activities of the business. Analysis of operating income for consecutive quarters can help an investor identify the profitability of the business and the growth opportunities it can provide for the long term.

Net income, on the other hand, is the final profit available for the shareholders after all expenses and income have been taken care of. Hence it is called a bottom line and used to pay out the dividends. Unlike operating income, it does contain any one-time expense or one-time income. For example, consider a pharma company which has a robust operating income but has been penalized by regulators. This one-time payment will not affect the operating income but will impact the net income and eventually the profit available to the shareholders. Investors should carefully analyze both operating income and net income before parking their money.

# 2 -Taxes and uses

Operating income only takes care of revenue generated and the cost of operations.  Net income takes care of not only revenue, costs, expenses but also one-time expenses, taxes, and surcharges. Therefore, sometimes you might see a big number on the operating income section of the balance sheet which gets completely wiped off in the bottom line. Since net income denotes the profitability of the firm it is used in calculating parameters like EPS, return on equity and return on assets. Shareholders are mainly interested in these ratios as these will only determine if their investments have been worthwhile.

Operating Income vs Net Income Head to Head Difference Between

Let’s now look at the head to head difference between Operating Income vs Net Income

Basis – Operating vs Net Income		Operating Income		Net Income
Definition		The operating income signifies the income generated from the primary operational activities of the business for a particular period		Net income is the income generated inclusive of all activities carried by the business unit for a particular period
Significance		Operating income helps in identifying how much revenue transforms into Profit		Net income identifies the earning potential of the business entity
Calculation		Operating income = Gross Income – Operating Expense – Depreciation and amortization		Net income = Operating income + Other income – Interest expense + one-time extraordinary income – onetime extraordinary expense – Taxes
Taxes		Taxes are not considered in Operating income		Net income is derived after considering taxes
Uses		Operating income is used to calculate return on capital employed		Net income is used to calculate ratios such as earning per share, return on equity, return on assets etc.

Final Thought

Both operating income and net income are important parameters while judging the financial health of the firm.  While long term investors will be more interested in understanding the robustness of the core business activities of the firm and hence will monitor the operating income with a close eye, short term traders will be more interested in the bottom line numbers as that will determine the earning potential of their speculative bets.

That is why most of the times you will see a sharp dip in the share price of a listed firm whenever there are some short-term setbacks like losing a lawsuit or penalized by regulators. Most of the times these are an overreaction by the short-term traders who are concerned about near term profitability and most often than not share prices do bounce back. For example, Maggi ban in India had a huge impact on Nestle India Ltd shares which dropped by 50% in 4 weeks before bouncing back to their initial levels within 2 quarters.

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