Operating income margin

Operating income margin has close relations with Earnings before interest and taxes (EBIT). While operating income margin is calculated by using operating income, which consists of operating expenses and depreciation, EBIT is calculated using operating expenses only. Sometimes, if the depreciation in the company is very low EBIT can be used as operating income when calculating Operating income margin.

Other difference between these formulas is the type of income. Calculation of EBIT - revenue is used, while in operating income margin - operating income. So it might be that starting point in EBIT calculation can be higher or lower. It might be affected by the additional income or losses that are not related to main activities of the company. These fluctuations might be caused by additional income, selling of real estate or even fluctuations of foreign currency.

Operating income avoids such income that is not related to its main activities. If a company has its own distribution facilities - trucks and lorries that take products to other cities, the company might have a contract with other, usually smaller company, for the distribution service from that city to home or any on-way city. Income from this activity is not main operation of the company, but it reduces the costs of distribution if we compound them. This income would be in the other activities section in the income statement.

If a company decided to sell some property that it owned, or decided to change owning into renting, it will have income from sold real estate that might also be not from the main activities of the company. When doing this, company reduces part of depreciation costs and reduces the asset row in a balance sheet. But it increases expenses of rent. It might be done if a company sells its building to some private person or company and rents the same building. It allows a fast “reconstruction” of a balance sheet without moving a business somewhere else. It affects depreciation and besides that - operating income margin.

One more aspect that can make a difference between EBIT and operating income is the fluctuation of foreign currency. Just imagine that you are an Indian and you are selling spices for a company in London. Your local currency is Indian rupees and they have pounds in Great Britain. None of these currencies are the main currencies in the world, so you can choose Dollars or Euros for your transactions. If you set fixed prices for your product you might suffer losses if the currency decreases a lot. Even if the prices are not fixed, but fluctuate as well, the currency exchange rate can change during the time of transaction between London and Indian banks. So you might get unexpected loss or profit depending on the rate. These changes also affect Operating income margin and EBIT, so it is useful to take it into consideration.

As it was mentioned, the differences between EBIT and operating income are depreciation, ant type of income (revenue) in the formula. It might be explained by the other activities in the company that gives extra revenue, selling of real estate that is owned by a company or changing it into renting instead of owning, and fluctuations of foreign currency - that affects this ratio if the company is trading internationally.