Operating Income: Formula, How It Differs From Net Income, and 2025 Filing Data
Michael Whitman
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Trading since 2017, full-time since 2020
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YouTube creator, 137K subscribers
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Published 2026-09-06
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Updated
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Reviewed
Operating income is what remains after cost of goods sold and operating expenses are subtracted from revenue, before interest and tax. Removing financing and tax makes it a better comparison between two companies than net income, because those depend on decisions unrelated to the business itself.
Operating income is revenue minus cost of goods sold and operating expenses: what a business earns from running the business, before interest and tax. In 2025 filings it swung harder than revenue, and much harder when revenue fell: SEC filers whose sales dropped 5% to 10% saw operating income fall a median 24.60%.
How it works
Revenue, minus cost of goods sold, minus operating expenses. What is left is what the business earned from operating. Written as a formula: operating income = revenue - cost of goods sold - operating expenses.
Interest and tax come out below it to give net income, the number quoted in headlines and the one that mixes three separate stories together.
As a percentage of revenue it is the operating margin. Operating income of $150 million on revenue of $1,000 million is a 15% operating margin, the form worth tracking across years.
Why the comparison works
Two companies with identical operations can report very different net income. One borrowed heavily and pays interest; the other did not. One sits in a high-tax jurisdiction; the other does not. Neither difference says anything about how well the business runs, and operating income removes both.
With one caveat that applies to every line on the statement: what counts as operating is partly a classification decision, disclosed in the accounting policies of the annual report and occasionally changed.
Divided by total assets, operating income becomes the basic earning power ratio; among 381 large US non-financial filers in fiscal 2025 its median was 6.49%.
The relatives it is confused with
EBIT, earnings before interest and tax, is usually the same figure and not always. Operating income excludes non-operating items by definition; EBIT is built from the bottom by adding interest and tax back to net income, so it includes anything non-operating that sat above the interest line, such as investment income or a gain on selling a building.
And it is not cash. Depreciation is subtracted before you reach it, and depreciation is an accounting allocation rather than a payment. Adding it back gets you toward EBITDA, which is a different measure with its own problems.
A worked example
Two hypothetical companies each earn $150 million at the operating line on revenue of $1,000 million, identical 15% operating margins. Company A has no debt and pays tax at 21%: net income is $150 million x 0.79, about $119 million. Company B borrowed to buy its assets and pays $70 million of interest, then the same 21% on the $80 million left: net income is about $63 million.
Reported profit differs by nearly a factor of two and the operations are identical. Anyone comparing the two on net income concludes one is a far better business; anyone comparing on operating income sees the same business with different balance sheets. The financing difference is real, and it belongs in a separate question about interest cover.
A real pair from 2025 filings shows the other thing operating income does: it magnifies. General Dynamics grew revenue 10.13%, from $47.716 billion to $52.550 billion, and operating income 11.68%, from $4.796 billion to $5.356 billion. Booz Allen Hamilton’s revenue fell 6.37% in the fiscal year to 31 March 2026, from $11.980 billion to $11.217 billion, and its operating income fell 24.60%, from $1.370 billion to $1.033 billion.
The original data
Sample: the SEC’s XBRL frames for calendar 2024 and 2025, which hold each filer’s annual figure for the fiscal year closest to the calendar year. A company is in if it reported operating income both years, the same revenue tag both years, has a ticker in the SEC’s list and had 2024 revenue of at least $1 billion: 1,187 filers, 101 of them with a home address outside the US. Percent changes need a positive base, so the 232 with zero or negative operating income in either year are left out, which leaves 955. Of those 232, 74 went from an operating profit to a loss, 42 of them on falling revenue.
| Revenue change, 2024 to 2025 | Companies | Median operating income change |
|---|---|---|
| Fell 10% or more | 25 | -50.01% |
| Fell 5% to 10% | 41 | -24.60% |
| Fell under 5% | 123 | -11.14% |
| Rose under 5% | 245 | +0.50% |
| Rose 5% to 10% | 236 | +9.62% |
| Rose 10% to 20% | 195 | +18.48% |
| Rose 20% or more | 90 | +41.10% |
The finding: operating income amplified revenue in both directions, and far more on the way down. Where revenue fell 5% to 10%, operating income fell a median 24.60%, close to four times the median revenue fall in that group (6.47%). Where revenue rose 5% to 10%, operating income rose a median 9.62%, about 1.3 times the median rise (7.44%). Small rises barely moved it at all: a median +0.50% where revenue rose less than 5%, against -11.14% where it fell less than 5%. Costs that do not shrink with sales are the usual explanation, and the filings themselves do not separate fixed from variable costs, so treat that as the textbook reading rather than something this data proves.
Direction did not always follow. In 122 of the 587 companies whose revenue moved 5% or more either way, operating income moved the opposite way, usually because of a one-off charge or a cost change. One year is one year: the falling groups are small (25 and 41 companies) and 2025 is a single economy.
The check. Nasdaq’s annual income statements, a separately compiled set of figures, were downloaded for the 302 companies in three of the groups (revenue down 10% or more, down 5% to 10%, up 5% to 10%). Nasdaq had statements with fiscal years matching the SEC’s for 295 of them, and its operating income figure was within 1% of the SEC’s on 276 of the 295. On Nasdaq’s own numbers the median change in operating income was -43.40% for the 23 companies whose revenue fell 10% or more, -24.60% for 39 that fell 5% to 10%, and +9.70% for 233 that rose 5% to 10%. The check covers how the figures were read from the filings; it is the same set of companies, not a second sample. Every company is in the revenue and operating income file.
When it fails
Operating income can rise while cash falls. Revenue recognized but not collected, inventory built and not sold, capital spending running ahead of depreciation: all of it is invisible here and visible on the cash flow statement. Reading one statement alone is a common and expensive mistake in company analysis.
The second failure is ignoring the financing that was excluded. A company with the same operating income as a competitor and far more debt is a different investment, and this line deliberately does not show that.
A third is comparing margins across industries. Operating margin describes a business model as much as gross margin does.
A fourth is missing reclassification. A cost moved between operating and non-operating changes this figure without changing the company.
And a fifth is treating one year as the level. On the 2025 filings a 5% to 10% drop in sales came with a median quarter off operating income, so a single strong year in a cyclical business is not a new baseline.
Questions people ask
How do you calculate operating income?
Revenue minus cost of goods sold minus operating expenses. On $1,000 million of revenue with $600 million of cost of goods sold and $250 million of operating expenses, operating income is $150 million.
Is operating income the same as EBIT?
Usually close, not always. EBIT can include non-operating items such as investment income or asset-sale gains that operating income leaves out.
What is the difference between operating income and net income?
Net income comes after interest and tax. Two companies with the same $150 million of operating income can report about $119 million and $63 million of net income if only one carries debt.
Why did operating income fall more than revenue?
The usual explanation is that the costs above it do not all fall with sales, though the filings do not split fixed from variable costs. In 2025 filings, revenue falls of 5% to 10% came with a median 24.60% fall in operating income.
Related
EBIT is the nearly identical measure and where the two differ. Operating expenses is the subtraction immediately above it. And income statement is the full sequence it sits inside.
Operating income is the line I compare across companies, because interest expense tells you about a financing decision and tax tells you about a jurisdiction, and neither says anything about whether the business is any good. Net income mixes all three and is quoted everywhere.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.