Revenue, Operating Income, Net Income Explained Clearly
TL;DR
- Revenue is the total income a company receives from selling goods or services. Costs must be deducted to get profit.
- Operating income is profit from core operations, and net income is the final profit after all items and taxes.
1. Definitions
- Revenue: Total income a company earns from transactions over a period, shown net of discounts and refunds.
- Operating Income: Profit after subtracting cost of goods sold and selling, general and administrative expenses from revenue. It reflects core business profitability.
- Net Income: Final profit after reflecting non-operating items (interest, investment gains/losses) and corporate taxes on operating income.
2. Why it matters
- Revenue is the first indicator to gauge market size and growth potential.
- Operating income is key to judge whether the core business generates profit, reflecting pricing, cost structure, and operating efficiency.
- Net income matters for available cash flow, dividend capacity, and financial health, but it is sensitive to one-time items and accounting policies, so inspect detailed line items.
3. Numeric example
Assumption: Annual results of a company
- Revenue: 10,000 million KRW (100억 원)
- Cost of goods sold: 6,000 million KRW (60억 원)
- Selling, general and administrative expenses: 1,500 million KRW (15억 원)
- Non-operating income (e.g., investment gains): 200 million KRW (2억 원)
- Non-operating expenses (e.g., interest): 300 million KRW (3억 원)
- Corporate tax expense: 400 million KRW (4억 원) (actual rates and calculations vary, check latest from brokerages or tax authorities)
Calculation steps
1) Revenue 100억 - Cost of goods sold 60억 = Gross profit 40억
2) Gross profit 40억 - SG&A 15억 = Operating income 25억
3) Operating income 25억 + Non-operating income 2억 - Non-operating expenses 3억 = Income before tax 24억
4) Income before tax 24억 - Corporate tax expense 4억 = Net income 20억
Table view
| Item | Amount (억 원) |
|---|---|
| Revenue | 100 |
| Cost of goods sold | 60 |
| Gross profit | 40 |
| SG&A | 15 |
| Operating income | 25 |
| Non-operating income | 2 |
| Non-operating expenses | 3 |
| Income before tax | 24 |
| Corporate tax expense | 4 |
| Net income | 20 |
4. Common misconceptions and cautions
- Operating income is not the same as cash flow. Depreciation and working capital changes create accounting versus cash differences.
- A high net income does not always mean a strong company if it includes one-time gains, reducing sustainability.
- Revenue growth does not automatically lead to higher profit. Cost control and expense management matter.
For deeper analysis, review notes to financial statements and the cash flow statement. Research
This article is for informational purposes and is not investment advice.
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