Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated January 16, 2021

What are Operating Earnings?

Operating earnings is a measure of profitability that tells investors how much of revenue will eventually become profit for a company. The formula for calculating operating earnings is:

Operating Earnings = revenue - cost of goods sold, labor and other day-to-day expenses incurred in the normal course of business

How Do Operating Earnings Work?

It is important to understand what expenses are included and excluded when calculating operating earnings. It typically excludes interest expense, nonrecurring items (such as accounting adjustments, legal judgments, or one-time transactions), and other income statement items not directly related to a company's core business operations.

To see how operating earnings work, consider Company XYZ's income statement:

Revenue$1,000,000
Cost of Goods Sold $500,000
Labor $300,000
General & Administrative Expense $50,000

Using this information and the formula above, we can calculate that Company XYZ's operating earnings are:

Operating Earnings = $1,000,000 - $500,000 - $300,000 - $50,000 = $150,000

Operating earnings as a percentage of sales is called operating margin. In this example, Company XYZ makes $0.15 in operating earnings for every $1 in sales.

Why Do Operating Earnings Matter?

Operating earnings is important because it is an indirect measure of efficiency. The higher the operating earnings, the more profitable a company's core business is.

Several things can affect operating earnings (such as pricing strategy, prices for raw materials, or labor costs), but because these items directly relate to the day-to-day decisions managers make, margins are also a measure of managerial flexibility and competency, particularly during rough economic times.

It is also important to note that some industries have higher labor or materials costs than others. This is why comparing operating earnings or operating margins is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.

Ask an Expert about Operating Earnings
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Operating Earnings.
Be the first to ask a question

If you have a question about Operating Earnings, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Operating Earnings, then please ask Paul.

Ask a question Read more from Paul

Read this next

Paul Tracy - profile
Ask an Expert about Operating Earnings

By submitting this form you agree with our Privacy Policy

Share
close
Don't Know a Financial Term?
Search our library of 4,000+ terms