Operating income (also called operating profit), is the profit a company earns from its core business operations, calculated after deducting the cost of goods sold (COGS) and all operating expenses from total revenues.
As a key profitability metric, operative income offers insights into a company's efficiency in managing its core business operations. Unlike gross profit, which only considers COGS, operative income factors in operating expenses. These expenses include costs associated with running the day-to-day business, such as salaries, rent, utilities, and marketing expenses.
However, operative income does not consider non-operating expenses and incomes, such as interest expenses, interest income, or one-time extraordinary items. These items are factored in when calculating net income, which provides a more complete picture of a company's profitability.
Thus, operative income is a valuable tool for assessing the profitability and efficiency of a company's core operations, excluding its financing activities and other non-operational factors.
For Google, operative income would include revenues from its main business operations such as advertising, subtracted by COGS and operating expenses like R&D costs, sales and marketing costs, and administrative expenses.
Airbnb's operative income would be calculated by taking its revenues from booking fees and subtracting COGS (like server costs) and operating expenses (like employee salaries and marketing costs).
For Ford, operative income would be calculated by subtracting the COGS (like raw materials and manufacturing labor costs) and operating expenses (like sales and marketing, and administrative costs) from its total revenues from vehicle sales.