Stock Investing For Dummy - What Are Operating Expenses, Operating Income And Operating Margin?

Posted by Nick Niesen on November 8th, 2010

All three of these terms have to do with the overall health of a company?s operations and the ability for it to continue as an ongoing firm. These figures are best studied over a period of time against competing firms within the market sector of the particular firm.

Operating expenses are part of the overhead costs attached to selling products on the market. They are not necessarily directly connected to the cost of the specific product being sold but must be included when figuring the operating expenses of a company. These include fixed costs of salaried employees (administration, sales, etc.) and variable costs (labor, research and development, etc.). Operating expenses are found on the income statement.

Operating income determines a company?s earning power from ongoing operations. This is the figure equal to earnings before deduction of interest payments and taxes. This is another figure commonly found on the income statement. This figure is also commonly referred to as operating profit or earnings before income and taxes (EBIT). Operating income is a direct result of a company?s efforts to turn a profit.

Operating income is required to determine operating margin along with net sales. Net sales is another figure that can be obtained directly from the income statement. By determining operating margin we can know the proportion of a company?s revenue that is left over after paying for variable costs of production (labor, raw materials, etc.). This figure helps the investor know the overall health of the company and how well managed the firm is. A firm must have a healthy operating margin to pay for the fixed costs involved in doing business like interest on debt. Operating margin is most valuable when tracked over time and compared to the operating margin of its competitors within the same market sector. Companies competing in different market sectors have different cost structures, of course.