Pretax Operating Income
Pretax operating income, also referred to as the operating income, is described as the overall pre-tax profit of a business enterprise obtained from the operations. It is the current available assets of the owner excluding any payments to be made such as income taxes, dividends and preferred stock. It is also described as the earnings of the company before any profits from the capital coming from miscellaneous sources and investments.
Operating income is often synonymous to EBIT which means Earning Before Interest and Taxes though EBIT basically involves both operating and non-operating income altogether. It is really an important factor that companies are aware of the resources and wealth that they have because in this way potential investors would be easily be enticed to invest in the company knowing the company’s status.
There are two main important factors to be considered in calculating the operating income of the company: the operating expenses as well as the operating revenue of the company. The operating revenue is described as the revenue that may come from different revenue channels like widget sales excluding the dividend income and the interest income. On the other hand, operating expenses are any expenses obtained from the daily function and management of the company at the same time excluding extraordinary expenses. In general the operating revenue is the revenue from the company’s sources recurring yearly while the operating expenses are the necessary expenses in a vast class recurring also yearly.
To understand best the difference of the two variables in calculation, it is best to give an example. Take for examples in a company that manufactures and retails widgets. As a potential investor, the capacity of the company when it comes to its operating income and the profits before any interest and taxes are bestowed are the two important factors to be taken into consideration.
Let’s start by looking at the operating revenue. The amount of money is obtained from the wholesale operations, online sales and store locations. Approximately, the amount reached of up to $5 billion USD.
Next are the operating expenses. These are the amount of money used for manufacturing including the raw materials, the distribution, payment for the employees, administrative cost, legal expenses, executive compensation, depreciation, amortization and miscellaneous. Suppose the amount reached of up to $3.5 billion of USD for the operating expenses only.
So the operating income is $1.5 billion by subtracting the operating expenses from the operating income. If they gained from foreign exchange and from non-operating income, then the overall earning will be calculated before tax and interest.
If in event that the company is in the verge of an operating income that is declining, the result would be lesser funds for the company’s expansion, for the owners, debt reduction and all the activities that should be done for a more successful management of the company. This is the reason why owners, shareholders and lenders are meticulous enough when it comes to the company’s operations to avoid bankruptcy.