How do operating income and revenue differ?

Operating income and revenue are important metrics that show the income earned by a company. However, the two numbers are different ways of expressing a company's earnings. Revenue and operating income have different deductions and credits involved in their calculations, and both are essential in analyzing whether a company is performing well.

Revenue is the total amount of income generated by a company for the sale of their goods or services. Revenue is often called the top line because it's located at the top of the income statement. Revenue is the income generated before any expenses are taken out. Therefore, when a company is said to have "top-line growth," the company's revenue is growing. Revenue is also called net sales which is revenue minus any returns of purchased merchandise. 

For example, a shoe retailer earns revenue from selling shoes, but the revenue figure is before deducting any expenses for running the business. If the company has other sources of income from investments, for example, the income is not considered revenue since it wasn't the result of the primary business. Any additional income is accounted for separately.

Operating income is a company's profit after subtracting operating expenses or the costs of running the daily business. Operating income helps investors separate out the earnings for the company's operating performance by excluding interest and taxes.

Operating expenses include selling, general & administrative expense (SG&A), depreciation, and amortization, and other operating expenses. Operating income does not include money earned from investments in other companies or non-operating income, taxes, and interest expenses. Also, any nonrecurring items are not included such as cash paid for a lawsuit settlement. Operating income can also be calculated by deducting operating expenses from gross profit whereby gross profit is total revenue minus cost of goods sold.  

Below is an example where operating income and revenue are highlighted to illustrate the differences between the two figures. The income statement is for J.C. Penney as of the end of 2017 as reported on their 10K annual statement.

• Total revenue or total net sales was $12.5 billion for 2017. Net sales is revenue minus returned merchandise which is common for retailers. 
• Operating Income was $116 million and is located further down the statement after deducting the expenses associated with operating for the year. The expenses included cost of goods sold of $8.1 billion and SG&A, or costs not directly tied to production, of $3.4 billion for a total of $12.39 billion (highlighted in red) to come up with the $116 million in operating income.
• Net income is the bottom line or earnings for the company and came in at -$116 million (a loss) for the year.

J.C. Penney earned $116 million in operating income while earning $12.5 billion in total revenue. The difference between the two numbers shows why analyzing financial statements can be challenging. Alone, the $12.5 billion in revenue appears impressive at the onset, but when factoring in expenses, the operating income was only $116 million.

Also, you'll notice that net income posted a loss for the year of $116 million after deducting the interest paid on the company's outstanding debt. The above example shows the importance of using multiple metrics in calculating the profitability of a company before investing.

For more on analyzing financial statements, please read "How the Income Statement And Balance Sheet Differ?"