Operating Income
Definition
Profit from core trading activity: gross profit less operating expenses, before interest and tax. Also called operating profit or EBIT, it isolates how well the business performs independently of how it is financed.
Related Terms in Financial Analysis
Net Income
The final profit figure after every expense, including cost of sales, operating costs, interest and tax. Also called net profit or the bottom line, and the figure that flows into retained earnings.
Gross Margin
Gross profit as a percentage of revenue, calculated as revenue less cost of goods sold divided by revenue. It measures how much of each sale survives direct costs and is the first place to look when pricing or supplier costs move.
Contribution Margin
Revenue less variable costs, the amount each additional sale contributes toward fixed costs and then profit. The basis of break-even analysis: fixed costs divided by contribution margin per unit gives the volume needed to break even.
Fixed Costs
Costs that do not vary with output over the relevant range, such as rent, insurance and salaried staff. They create operating leverage, so profit rises faster than revenue once they are covered and falls faster when volume drops.
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