Operating income measures the profitability of business operations, while EBITDA tracks a company’s financial performance without taxes, loans, and capital expenses.
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What is operating income?
Operating income measures a company’s profit (also known as operating profit) from core business operations.
Operating income formula
You can calculate operating income by starting with your gross profit and subtracting operating expenses (OpEx), depreciation, and amortization:
where:
- Gross profit = Total revenue minus cost of goods sold (COGS)
- Operating expenses = Selling, general, and administrative (SG&A) expenses
- Depreciation expense = Depreciation cost of assets for the given period
- Amortization = Amortization expense for the given period
You can also calculate operating income by working backward from your net income. But keep in mind—operating income excludes non-operating income, like interest earned, investment gains, or the sale of assets.
If your business has non-operating income, you’ll need to subtract it from net income first. Then, add back non-operating expenses (such as interest and taxes) to arrive at your operating income.
This approach helps isolate earnings from your core business operations—without the noise of one-time gains or financial investments.
You can do so using the following formula:
- Operating Income = (Net Income – Non-Operating Income) + Interest + Taxes
where:
- Net Income = Net profit
- Interest = Interest expense on business loans
- Taxes = Business taxes (such as income tax)
If you don’t have any non-operating income, the formula will simply be:
Operating income example
To get a better idea of how operating income works, let’s consider an example by looking at the annual income statements for Adobe.
For the fiscal year 2021, Adobe reported an operating income of $5.802 billion. Let’s use the operating income formula to see how they arrived at that number.
- Operating income = gross profit – operating expenses – depreciation – amortization
According to their income statement, Adobe had a gross profit of $13.920 billion and total operating expenses of $8.118 billion (which includes $172 million in amortization of intangibles).
The company doesn’t list any depreciation expenses.
So, when we plug those numbers into the formula, we get:
- Operating income = $13.920 billion – $8.118 billion = $5.802 billion
How to interpret operating income
While net income shows a company’s total earnings after accounting for all expenses and income sources, operating income focuses on profits generated from core business activities. It helps isolate how much of your company’s performance comes from operations—excluding factors like investment gains or interest expenses.
Take Adobe as an example: the company reported $5.802 billion in operating income from its products and services. After factoring in non-operating income (like investment gains) and subtracting interest and taxes, net income came in at $4.822 billion.
In this case, operating income was higher than net income—because interest and taxes reduced the final figure. But the impact was relatively small, and Adobe still showed strong overall profitability.
For startups or smaller businesses, the gap between operating and net income can be more significant—especially if the company carries debt or is managing early-stage financing. Tracking both metrics helps you understand how operations are performing and where other financial factors may be affecting your bottom line.
For example, let’s say you have the following financial performance records:
- Operating income: $100,000
- Interest expense: $70,000
- Tax expense: $40,000
Operating income can offer a clearer view of your business’s performance—especially when net income shows a loss. For example, your core business might generate a $100,000 operating profit, but after accounting for interest and taxes, you end up with a $10,000 net loss.
Including operating income in your pitch deck helps demonstrate to potential investors that your operations are healthy—even if net income is temporarily negative due to financial obligations.
You can also use operating income to calculate important performance metrics. For example, dividing operating income by total revenue gives you your operating profit margin—a key KPI that shows how much profit you earn from each dollar of revenue. It’s a strong indicator of operational efficiency and how well your business converts sales into earnings.
Advantages of operating income
Operating income is an excellent way to understand whether your core business is viable. A positive operating income tells you that the core business has broken even.
In other words, it generates enough revenue to cover the cost of goods sold and operating expenses. You can also see how well your business manages overhead by comparing operating income to gross profit.
Disadvantages of operating income
By itself, operating income doesn’t provide a complete picture of profit. Your core business can be profitable, but you may have a net loss if your interest and tax expenses are high.
Another disadvantage is that it doesn’t account for non-operating income streams, such as investments. It’ll not tell you how much your business made (or lost) once all income sources and expenses are considered.
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What is EBITDA? (+ formula and examples)
EBITDA (earnings before interest, taxes, depreciation, and amortization) measures a company’s ability to generate profit from its core operations—before accounting for key financial costs and non-cash expenses.
To calculate EBITDA, start with net income and add back interest, taxes, depreciation, and amortization.
Net income includes both operating and non-operating income, which means it factors in sales revenue as well as gains from activities like investments or asset sales. By adjusting for these items, EBITDA gives you a clearer picture of your company’s operating performance.
EBITDA formula
where:
- Net income = total income minus total expenses
- Interest = interest expense on business loans
- Taxes = business taxes, such as income and employer taxes
- Depreciation expense = depreciation cost of assets for the given period
- Amortization = amortization costs for the given period
EBITDA example
Unlike operating income, EBITDA is not an official measurement of the Generally Accepted Accounting Principles (GAAP), which means that companies are not required to disclose this number on their financial statements. However, you can calculate it using the numbers available on those statements.
Let’s see how this works by looking back at Adobe’s income statement.
- EBITDA = net income + interest + taxes + depreciation + amortization
- EBITDA = $4.822 billion + $113 million + $883 million + $0 + $172 million
- EBITDA = $5.99 billion
How to interpret EBITDA
Financial analysts and potential investors often use EBITDA to compare earning potential between companies. Interest, taxes, depreciation, and amortization are excluded in this case because they are unrelated to the cost of production or sales.
Investors also use EBITDA to see how much cash companies have available to pay off their debt, which is especially relevant for small businesses and startups.
If we compare the various profit estimates for Adobe, we have:
- Net income of $4.882 billion
- Operating income of $5.802 billion
- EBITDA of $5.99 billion
Among profitability metrics, EBITDA often paints the most optimistic picture. That’s because it includes non-operating income and adds back interest, taxes, and non-cash expenses—offering a high-level view of operational earnings.
EBITDA is often the starting point for financial analysis. After calculating it, you can calculate the EBITDA coverage ratio, which tells you how much capital a business has available to pay off its liabilities. Similarly, you can use it as a valuation method for post-revenue startups.
You can also use the EBITDA margin—EBITDA divided by total revenue—to benchmark performance across similar companies and assess growth potential. It’s a helpful tool for comparing operational efficiency, especially when evaluating funding readiness or preparing for valuation conversations.
Advantages of EBITDA
Compared to the net and operating income, EBITDA can make your company look more profitable, resulting in a higher valuation.
It’s also commonly used by investors and financial analysts since it helps them compare the earning potential of businesses with different debt and tax situations.
Disadvantages of EBITDA
The primary drawback of using EBITDA is that it can significantly overstate a company’s profitability, especially if the business is highly-leveraged.
Furthermore, it doesn’t differentiate between operating and non-operating income sources. Due to this, EBITDA isn’t a reliable metric for understanding whether or not your core business is profitable.
When to use operating income vs. EBITDA
Understanding profit is essential for business owners and investors. The question becomes: which metric should you use?
Before we dive into that, let’s take a quick look at the key differences between the two:
Operating income and EBITDA both measure profitability—but from different perspectives.
Operating income focuses on your core business. It tells you whether your product or service is viable and generates profit from day-to-day operations. It’s also the basis for key financial ratios—like operating profit margin—which show how efficiently you turn revenue into profit.
EBITDA, on the other hand, takes a broader view. It reflects your company’s overall ability to generate profit, including income from investments or one-time gains. It adds back non-cash expenses and financial costs to give a high-level picture of earnings.
For startup founders and small business owners, operating income often delivers more relevant insights. It helps you track when you become profitable—and how that profit grows over time—as you scale your core offering.
Both metrics are useful. Together, they offer a fuller understanding of performance, helping you plan with clarity and confidence.
Key takeaways
- Operating income and EBITDA are essential metrics for understanding a company’s financial health, although they measure different aspects of profitability
- Operating income focuses on profit from core business operations, excluding non-operating income like investments or asset sales
- EBITDA provides a broader view by excluding interest, taxes, depreciation, and amortization, offering insight into overall cash flow and financial performance
- Both metrics are valuable for different purposes: operating income for understanding core business viability and EBITDA for assessing overall profitability and financial health
- The choice between using operating income or EBITDA depends on the specific financial insights you need, whether you’re evaluating core operations or overall financial performance
Additional performance metrics to track
Ultimately, no single metric can summarize your company’s financial health and business performance. Let’s look at some other essential metrics to track and see what they tell you.
- Sales performance metrics (such as average deal size and conversion rates) tell you how efficiently your sales reps work. In particular, conversions are helpful for revenue forecasting since they tell you how many leads you need at the top of the funnel to meet your sales goals.
- Rule of 40 (sum of growth rate and profit margin) accounts for the growth rate and profitability and gives you insight into how well your company can sustain its performance.
- Cash flow metrics (such as net burn and runway) support SaaS financial modeling, and tell you your operating costs and how much it takes to keep your company running.
By tracking sales performance, growth, and profitability over time, you get a much better picture of the health and potential of your business.
Operating income vs EBITDA FAQs
Which is higher: EBITDA or operating income?
Typically speaking, EBITDA should be higher than operating income because it includes income plus interest, taxes, depreciation and amortization. EBITDA offers a more holistic view of company profitability while operating income only takes into account core operations.
What is the rule of 40 and how can it help a company increase growth and profitability?
The rule of 40 is a business and financial metric designed to assess the balance between growth and profitability in a company, measured by adding its growth rate and profit margin together. A result of 40 or higher indicates a healthy balance between growth and profitability that suggests long-term success for any given enterprise.
Recommended For Further Reading
How are EBIT and EBITDA different?
EBITDA and EBIT are both used to evaluate a company’s profitability—but they highlight different aspects of financial performance.
EBIT (earnings before interest and taxes) adds back only interest and tax expenses.
EBITDA (earnings before interest, taxes, depreciation, and amortization) goes a step further by also excluding non-cash expenses.
Because of this, EBITDA is typically higher than EBIT, offering a more optimistic view of earnings.
What is tax provisioning?
Tax provisioning is money set aside by businesses to pay their estimated future taxes. This is done because businesses don’t usually know their exact net income or applicable tax rate until the end of the year so they generally use estimates to calculate tax provisions.
