A companies’ operation means its major business area. Operating Income is the amount of profit realized from a business’s operation. It is a measure of companies’ profitability that tells us how much revenue will eventually be earnings for the company. It is calculated by deducting COGS and other operating expenses from revenue. A business’ s operating expenses are costs incurred from normal operating activities. Operating Income shows whether the company is doing well or not. It is popularly known as EBIT (Earnings Before Interest and Tax). Operating Income growth is the change in operating income on year-on-year basis.
Operating income of a company is the income from its operations. The growth rate needs to be calculated as it is essential for any company to maintain operating income growth in order to survive, prosper and remain competitive. For a company to grow its operating income must grow. The rate of growth is important for any company’s future prospects. The growth rate must be reasonable. The rate of growth should be at par or better than the growth of the industry so that the business is competitive.
Now, operating income growth can be due to an increase in sales or an increase in sales margin due to price rise or reduction in the cost of operations. Understanding the reason behind operating growth is crucial in analyzing a company’s performance. If the operating income growth is due to operating income efficiency, the growth is generally considered to be sustainable. Operating income growth should be compared as on year-on-year basis and also it should be compared with business in the same industry.
Operating Income = Revenue from operations – Operating expenses.
Operating Income growth (%)=Operating Income of year (n-1) – Operating Income of year(n) x 100 Operating Income of year(n)
Suppose a company ABC has Revenue from operations Rs. 1,00,00,000. Its operating expense is Rs. 75,00,000. Then, operating income or profit = 1,00,00,000 – 75,00,000= Rs. 25,00,000.
Now, suppose last years’ operating income was Rs. 20,00,000.
Operating income growth (%) = 25,00,000 – 20,00,000 X 100 = 25% (year-on-year basis)
Thus, the operating income growth is 25% year-on-year basis.
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