Operating Income

• Operating income is calculated taking gross income less operating expenses and depreciation. Operating expenses include cost of goods sold. Non-core activities such as income from investments are not included as part of operating income. Interest payments and taxes are also not included. A company with a higher amount of operating income has greater flexibility, which opens up other options for management such as increasing its dividend, making acquisitions and buying back shares.
  
  

Operating Margin

• Operating profit margin reveals how much earnings the company gets to keep after subtracting operating expenses. Operating margin = Sales - (Cost of goods sold + general & administrative expenses + sales + marketing expenses+ research & development expenses + depreciation expenses + recurring non-financing expenses associated with on-going operations) divided by Sales. Investors covet stocks in a company with higher operating margins because it signifies better operating efficiency.
  
  

Comparative Analysis

• Financial ratio analysis is using financial statements to examine the relationship of different components to determine a company's operating efficiency. Operating margin is one of many financial ratios. In order to make a good assessment, compare a company's operating income over time such as year over year and sequentially. You want to see stable operating or improving operating income over time. Unusual or unstable operating income, although not bad, is a signal that the company has not yet reached a point of achieving operating efficiency. This is particularly true for new companies.
  
  

Peer Analysis

• Calculating a company's operating income is good but incomplete without comparing it with a peer group of similar companies. While each company is unique, you want to see a company's operating income falling in line more or less with its competition. A company that consistently earns less operating income, all else being equal, is less efficient. Monitor the activities of the company to evaluate the steps that management is taking to improve operating efficiency. Steps can include reducing overhead, increased prices and improved sales.