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Operating Income

In financial and business accounting, earnings before interest and taxes (EBIT) is a measure of a firm's profitability that excludes interest and income tax expenses.[1]

EBIT = Operating Revenue – Operating Expenses (OPEX) + Non-operating Income

Operating Income = Operating Revenue – Operating Expenses[2]

Operating income is the difference between operating revenues and operating expenses, but it is also sometimes used as a synonym for EBIT and operating profit.[3] This is true if the firm has no non-operating income.

A professional investor contemplating a change to the capital structure of a firm (e.g., through a leveraged buyout) first evaluates a firm's fundamental earnings potential (reflected by EBITDA and EBIT), and then determines the optimal use of debt vs. equity.

To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues.[4] Profit is later obtained by subtracting interest and taxes from the result.

Statement of Income — Example
(figures in millions) Operating Revenues      Net Sales $20,438 Operating Expenses      Cost of goods sold $7,943      Selling, general and administrative expenses $8,172      Depreciation and amortization $960      Other expenses $138          Total operating expenses $17,213 Operating income $3,225      Nonoperating income $130 Earnings before interest and income taxes (EBIT) $3,355      Net interest expense $145 Earnings before income taxes $3,210      Income taxes $1,027 Net income $2,183

(Table info source: Bodie, Z., Kane, A. and Marcus, A. J. Essentials of Investments, McGraw Hill Irwin, 2004, p. 452.)

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