Translation: Operating Income = Operating Income (or Operating Profit).

Simple definition: It is a financial metric that shows the amount of net profit a company generates solely from its core business activities, after deducting all operating expenses (such as salaries, rent, and marketing costs), but before deducting taxes and interest on debt. In other words, it tells us how efficiently a company manages its day-to-day operations and generates profit from them, without the picture being affected by the company’s financing decisions or tax burden.

How is it calculated?

Operating income = (Gross profit) - (Operating expenses)

Note: Operating expenses include general and administrative expenses, as well as selling and distribution expenses. (Gross profit is simply: Revenue - Direct cost of sales).

Example: Suppose a company specializing in coffee sales generated revenue of 100 million riyals, while the cost of coffee beans and cups (cost of sales) was 40 million riyals. This means that "gross profit" was 60 million riyals. If the company paid 25 million riyals in employee salaries, branch rent, and marketing expenses, then operating income would be 35 million riyals (60 million - 25 million).

What does it mean for you?

  • High or growing levels: This clearly indicates that the company is highly efficient in managing its core business and has a competitive advantage that enables it to control its costs successfully, reflecting the strength and sustainability of its business model.
  • Declining levels (especially alongside revenue growth): As seen in Alamar’s latest results, this decline indicates that the company’s margins are under pressure. It may be due to a temporary and justifiable reason, such as expansion and integration costs, or it may be an early warning sign of inefficiencies in management and a loss of control over day-to-day expenses.
  • Fair comparison between companies: Operating income is an excellent tool for comparing core performance between two companies in the same sector. It isolates the financing structure: Company A may be heavily indebted and pay substantial interest, while Company B may have no debt. Operating income allows you to compare both companies’ ability to sell their products and manage their operations without the influence of that debt.

Frequently asked question: Why do financial analysts sometimes prefer to focus on "operating income" rather than the final "net income" when evaluating management?

Answer: Because "net income" (the bottom-line figure on the income statement) may be affected by exceptional factors and items that do not reflect true, sustainable performance, such as sudden changes in taxes, one-time gains (such as selling an old company headquarters), or financing costs on large loans. By contrast, "operating income" serves as a clear reflection of management’s ability to run its core day-to-day business and generate cash solely from the activity for which the company was established.