Operating income is the money a business has after subtracting operating expenses and cost of goods sold from sales. Operating income is also called EBIT, which stands for earnings before interest and taxes. This term reflects the fact that operating income doesn’t count financing expenditures or income taxes.
Investors and managers find the percent change in EBIT useful because it shows whether if the company’s day-to-day business operations are earning more than they did in the past. A company reports EBIT on its income statement, which is part of its annual report. You can usually find a company’s annual reports on its investor relations website. You will need income statements for the current year and prior year to calculate percent change in operating income.
Changes in Operating Income
Subtract the operating income from the previous year from that of the current year. Divide the remainder by the past year’s operating income and multiply by 100 to state the answer as a percentage. Suppose a firm earned $1.5 million in operating income in 2104 and $1.8 million in 2015. Subtract $1.5 million from $1.8 million, leaving $300,000. Divide $300,000 by $1.5 million. Multiply by 100 and you get a change in operating income of 20 percent. Sometimes prior year operating income is more than that of the current year, so you get negative numbers for the dollar amount and percent change. This indicates a decline in operating income. Enclose the answer in parentheses to show that the change is negative, not positive.
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