What is 'operating income'?

Operating income is best defined as the earnings before interest and taxes. It represents a company's profitability from its core business operations, excluding any effects of financing or tax strategies. This figure is essential for stakeholders as it highlights how effectively a company is managing its primary business activities, allowing for a clearer understanding of operational efficiency.

Operating income is calculated by subtracting operating expenses (such as cost of goods sold and administrative expenses) from total revenue. This metric provides insight into the earnings generated from regular business activities, making it invaluable for analyzing a firm's performance without the influence of financial or tax-related complexities.

Understanding this concept is crucial for evaluating a company’s operational performance and making comparisons with industry peers, as it provides a more consistent basis for comparison than net income, which can be influenced by various external factors.