Operating Earnings Explained

Operating earnings can be defined as the amount of profit earned by a company after subtracting all the expenses of the company from its total revenue. Expenses that affect operating earnings can be categorized as cost of goods sold, marketing costs, inventory maintaining costs and depreciation etc. operating earnings reflect the core or the basic profit earned by the company and hence it can be used as a tool to measure the profitability of the business. It must be noted that operating earnings don’t include other expenses such as interests and taxes paid by the business.

Sometimes operating earnings are confused with another important measure of business profit called EBIT. However it must be noted that EBIT and operating earnings are two different things as later excludes expenses such as interest where as EBIT includes non-operating income. In order words operating earnings can be defined as the percentage of amount of revenue of a company that will be converted into profit. Formula of operating earnings can be shown as under:-

Operating Earnings =Total Revenue- Expenses (Cost of goods sold +day to day expenses + labor cost + inventory maintenance cost)

Nonrecurring items are also excluded while calculating operating earnings. These nonrecurring items can be termed as accounting adjustments or legal settlements. All the other items that are not directly related to core operations of the business are also excluded from the operating earnings. Operating earnings can be termed as indirect measure of the efficiency of a business as higher operating earnings indicate higher core profit of a particular business.



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