Definition
Operating income, sometimes also called Earnings Before Interest and Taxes (EBIT), is the profit a company earned through operations. All expenses, including cash expenses such as cost of goods sold (COGS), research & development, wages, and non-cash expenses, such as depreciation, depletion and amortization, have been deducted from the sales.
Operating Income (EBIT)
= Revenue - Cost of Goods Sold - Selling, General, & Admin. Expense (SGA) - Research & Development - Depreciation, Depletion & Amortization
= Gross Profit - Selling, General, & Admin. Expense (SGA) - Research & Development} (R&D)
- Depreciation, Depletion & Amortization (DDA)
= EBITDA - Depreciation, Depletion & Amortization (DDA)
Formula
Operating Income (EBIT)
=
Revenue -
Cost of Goods Sold -
Selling, General, & Admin. Expense (SGA) -
Research & Development -
Depreciation, Depletion & AmortizationCato Corporation Operating Income Calculation
* All numbers are in millions except for per share dataCato Corporation Annual Data
| Jan04 | Jan05 | Jan06 | Jan07 | Jan08 | Jan09 | Jan10 | Jan11 | Jan12 | Jan13 |
|---|
| Operating Income |  | | | | | | | | | |
|---|
Cato Corporation Quarterly Data
| Oct10 | Jan11 | Apr11 | Jul11 | Oct11 | Jan12 | Apr12 | Jul12 | Oct12 | Jan13 |
|---|
| Operating Income | | | | | | | | | | |
|---|
Explanation
Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatts definition.
Return on Capital (ROC) = (EBIT - Adjusted Taxes) / (Book Value of Debt + Book Value of Equity - Cash)
Joel Greenblatts definition of Return on Capital:
Return on Capital = EBIT / (Net fixed Assets + Working Capital)
It is also linked to Joel Greenblatts definition of Earnings Yield:
Earnings Yield = Earnings before Interest & Taxes / Enterprise Value.
EBIT is also linked to Operating Margin:
Operating Margin = Operating Income (EBIT) / Total Revenue. Beaware
Compared with a companys EBITDA margin, Operating Margin can be manipulated by adjusting the rate of depreciation, depletion and amortization (DDA).
If a company is facing competition, its Operating Margin may decline. Often the Operating Margin declines well before the companys revenue or even profit decline. Therefore, Operating Margin is a very important indicator of whether the company is facing problems.
For instance, by 2012, Nokia (NOK)s problems were well known and its stock had lost more than 90% of its market value since 2007. But Nokias Operating Margin had already been in decline since 2002, although its earnings per share were still rising. Investors who paid attention to Operating Margin would have avoided this huge loss. The same can be said for Research-in-Motion (RIMM).
Therefore, Operating Margin is a very important screening filter for GuruFocus. GuruFocuss
Buffett-Munger screener requires that the profit margin is either consistent or expanding. The Model Portfolio of the Buffett-Munger screener has outperformed the market every year since inception in 2009.
Related Terms
Return on Capital,
Earnings Yield,
Operating Margin* All numbers are in millions except for per share dataCato Corporation Annual Data
| Jan04 | Jan05 | Jan06 | Jan07 | Jan08 | Jan09 | Jan10 | Jan11 | Jan12 | Jan13 |
|---|
| Operating Income | | | | | | | | | | |
|---|
Cato Corporation Quarterly Data
| Oct10 | Jan11 | Apr11 | Jul11 | Oct11 | Jan12 | Apr12 | Jul12 | Oct12 | Jan13 |
|---|
| Operating Income | | | | | | | | | | |
|---|
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