What Is Operating Income?

Operating income, often shortened to EBIT (earnings before interest and taxes), is what a company earns from its core business: revenue minus the cost of its products and every cost of running the company, but before interest on debt, income tax and gains or losses on investments. It answers the question of how much the business made doing what it does, before financing and tax decisions enter the picture.

How it's calculated#

Operating income = Revenue - Cost of sales - Operating expenses

Operating expenses usually fall into three groups: sales and marketing, general and administrative, and research and development. Say a company sells $1 billion of goods that cost $600 million to make, and spends $250 million on operating expenses. Operating income is $150 million, and operating margin, which is that income divided by revenue, is 15%.

Operating income matters for one reason above all: it does not depend on how the company is financed. Two identical factories, one carrying a large loan and one carrying none, report the same operating income and very different net income. That is why ratios that compare businesses are built on operating income, from operating margin to the interest coverage ratio, which counts how many times operating income covers the cost of debt.

A real example#

Microsoft's fiscal 2026, which ended on June 30, 2026, produced $155.24 billion of operating income on $331.84 billion of revenue, an operating margin of 46.8%. Net income for the same year was $133.75 billion, up 31%.

Inside that net income, though, sits an item operating income does not contain: $4.96 billion of net gains on the OpenAI investment after tax ($6.53 billion before tax), reported outside operations. A year earlier the same investment produced a $3.62 billion loss after tax. So part of the jump in net income is a swing in the value of a stake in another company, not stronger sales of Azure or Office. Microsoft itself shows a version of net income without these items, $128.79 billion, up 22% rather than 31%.

It is a clean illustration of why analysts start from operating income. It shows the business, not the investment portfolio or the capital structure.

What operating income hides#

Operating income is not cash. It includes depreciation, an accounting cost with no cash leaving that year, and it excludes capital expenditures, which are a very real outflow. A company can report rising operating income while spending more on investment than it earns, and that only shows up in the cash flow statement.

It also includes one-time items if the company books them there: write-downs, restructuring charges, gains on selling assets. When comparing several years, check whether any single year carries one of them.

Related terms#

Operating margin turns operating income into a percentage of revenue, so companies of different sizes can be compared. EBITDA is operating income with depreciation and amortization added back. Net profit margin shows how much of the profit is left after interest and tax. The gap between accounting profit and cash is unpacked in net income vs cash flow.