Tag Archives | operating income

Return on Capital Employed (ROCE)

See Also:
Return on Asset Analysis
Return on Equity Analysis
Financial Ratios
Return on Invested Capital (ROIC)
Current Ratio Analysis

Return on Capital Employed (ROCE) Definition

The return on capital employed ratio is used as a measurement between earnings, and the amount invested into a project or company.

Return on Capital Employed (ROCE) Meaning

The return on capital employed is very similar to the return on assets (ROA), but is slightly different in that it incorporates financing. Because of this the ROCE calculation is more meaningful than the ROA. The ROCE is generally used to find out how efficient and profitable a company is from year to year. As it is a percentage a company can locate problems or areas of improvement with the fluctuation of this ratio from year to year.

Return on Capital Employed (ROCE) Equation

The return on capital employed equation is as follows:

ROCE = EBIT or NI/(Total Assets – Current Liabilities)

Note: The earnings before interest and taxes, known as the operating income, is normally used, but people can also use the Net Income if they would like to incorporate the net interest and taxes into the ROCE formula.

Return on Capital Employed (ROCE) Example

Tim found that the ROCE last year is 16%. He would like to compare this number to the current ROCE. He begins by finding the following numbers in the Balance Sheet as well as the Income Statement:

Net Income = $50,000
Total Assets = $360,000
Current Liabilities = $35,000

ROCE = $50,000/($360,000 – $35,000) = 15%

Note: The drop in this number means that Tim’s company is not as efficient as it used to be or that it decreased it current liabilities.

return on capital employed

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Proforma Earnings

See Also:
Pro-Forma Financial Statements
Retained Earnings
EBITDA
Operating Income (EBIT)
Financial Ratios

Proforma Earnings Definition

Pro forma earnings are a company’s earnings that exclude rare, extraordinary, or nonrecurring items. Companies may incur expenses that do not reflect typical operating expenses. These expenses, which must be disclosed in financial statements in accordance with GAAP standards, can impact a company’s financial performance in a given accounting period. Proforma earnings exclude these extraordinary expenses in order to provide a clearer picture of the company’s financial performance. You can also call proforma earnings core earnings, operating earnings, or ongoing earnings.

A company’s earnings are a key measure of its financial performance. Creditors and investors examine a company’s earnings to evaluate its financial performance when deciding whether or not to lend to or invest in the company. Compare current period earnings to prior period earnings of the same company to gauge progress over time. Or compare current period earnings to industry peers and competitors to assess the company’s competitive position in the marketplace.

Earnings According to the SEC and GAAP

The SEC requires publicly traded companies to report net income and operating income in financial statements prepared according to GAAP regulations and procedural standards. The investing public scrutinizes these measures of financial performance. However, some businesspeople often consider these income measures to be inaccurate to some degree.

GAAP standards require businesses to include rare, extraordinary, or nonrecurring items in their financial statements. But company executives believe that including these rare, extraordinary, and nonrecurring items in the financial statements obscures the true picture of the company’s financial performance. Therefore, some companies prefer to publish pro forma earnings in their financial statements along with their SEC-required GAAP-standardized earnings.

Proforma Earnings – Explanation

These pro forma earnings, or hypothetical earnings that exclude items deemed rare, extraordinary, or nonrecurring by the individuals preparing the pro forma financial statements, are considered to provide a clearer and more accurate picture of the company’s financial performance for the relevant accounting period. For example, when prepared in accordance with GAAP regulations, a company may show a loss for a given accounting period. However, during that same period, a company can show a profit in its pro forma earnings.

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Proforma Earnings

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Proforma Earnings

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Net Operating Loss Carryback and Carryforward

Net Operating Loss Carryback and Carryforward

What is a net operating Loss carryback and carryforward? A net operating loss occurs when a company’s operating expenses and allowable tax deductions exceed its operating income for an accounting period. Companies pay taxes on operating income. When companies incur an operating loss, there is no taxable income, so they pay no taxes. According to GAAP, companies can take an operating loss in the current period and use it to offset operating gains in past or future periods.

In the U.S., an operating loss can be “carried-back” to offset operating income from previous periods. Or it can be “carried-forward” to offset operating income in future periods. Companies subtract the amount of the operating loss in one period from operating income in previous or future periods. Then they are able to reduce the taxable income in those periods.

According to GAAP, a net operating loss can be carried-back up to 3 years. That is, apply it to any year within three years prior to the year in which the operating loss is incurred. You can carry-forward a net operating loss up to 7 years. Apply the loss to any year within seven years after the year in which the operating loss is incurred.

Net Operating Loss Carryback and Carryforward

See Also:
Net Sales
Net Income
Allowance for Uncollectible Accounts
Company Life Cycle
Dispersion

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Operating Income Example

See Also:
Operating Income (EBIT)

Operating Income Example

For example, Marilyn is the CEO of a company which creates educational children’s toys. Marilyn loves her work and truly knows her business. With the support of her family and local bank Marilyn has taken her idea from startup to success in only 3 years. Pleased with her achievement, she wants to maintain what she has created.

Marilyn has come upon the bank period for the loan she has taken to start her business. She is almost finished with paying her liability and wants to make sure she exits the deal on good terms. Marilyn needs to make sure all of the financial ratios in her loan agreement are satisfactory in the view of her bank. This mainly revolves around her company operating margin.

Marilyn contacts her accountant. She needs to access her financials in order to find her EBIT to assure it is complaint with the loan covenant. Her company results are listed below:

$1,000,000 in revenues; $250,000 in cost of goods sold; and $100,000 in operating expenses.

EBIT = $1,000,000 – ($250,000 + $100,000) = $650,000

Marilyn then reviews her paperwork with the bank. She finds that she is complaint with their requirements and will soon be able to complete both interest and principal payments. She is extremely relieved because she is lifting a huge weight off of her shoulders. Additionally, she is in good standing with the bank and could use them as a source for capital to grow her business further. She is excited about what the future holds for her experience as an entrepreneur.

Operating Income Calculation

Operating income calculations simply involve addition and subtraction. When performed properly they serve great value with a relatively little amount of effort.

Example: A company has $1,000,000 in revenues; $250,000 in cost of goods sold; and $100,000 in operating expenses.

EBIT = $1,000,000 – ($250,000 + $100,000) = $650,000

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Operating Income
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Operating Income

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Operating Income (EBIT)

See Also:
Operating Income Example
EBITDA Definition
Net Income
Free Cash Flow
Operating Profit Margin Ratio
Time Value of Money (TVM)

Operating Income (EBIT) Definition

What is operating income? Earnings before interest and tax, also know as operating income (EBIT), is defined as a measure of a company’s profit from ordinary operations, excluding interest and tax. EBIT is also called net operating income, operating profit, or net operating profit. Calculate it using the following equation: revenues minus cost of goods sold (COGS) and other operating expenses.


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What is Operating Income? Operating Income Explanation

Operating income is a measure of company operations. It is also one of the most common financial ratios used for valuing a company as a whole. Therefore, it is very valuable, as well, as a measure of the success of a company from period to period. Additionally, it is the measure of the ability of a company to cover costs and make profit. Operating income ratios leaves out interest and taxes, so it does not serve as a net value of the wealth created from a business. More, it is a general tool used to evaluate the operating process and efficiency which ultimately lead to company profits.

One of the overall advantages of using operating income (EBIT) over other financial ratios is in the simplicity and standardization of calculation. Though interest and taxes play an important role in the financial health of a company they do not, generally, make or break the model for success. When evaluating operating income vs net income, ask whether you need a measurement of company operations as a whole or company operations as they lead to profit.

Operating Income Formula

The operating income formula provides a simple calculation for evaluating common business models. Calculating this equation is fairly simple when one has the three following values: revenues, cost of goods sold, and operating expenses.

Operating Profit = Revenues – (COGS + Operating Expenses)

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Operating income (EBIT), What is Operating Income

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Operating Income (EBIT), What is Operating Income

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Income Statement

See Also:
Compound Annual Growth Rate (CAGR)
Financial Reporting
Financial Ratios
Balance Sheet
Standard Chart of Accounts
Common Size Financial Statement
Balancing the Balance Sheet

Income Statement Definition

The income statement definition is a financial statement that shows a company’s revenues and expenses over a period of time. Furthermore, it reports a company’s financial performance over the course of an accounting period, typically a month or quarter. Basically, it starts with the money a company earns, and subtracts out the costs of running the business to get the company’s profit or loss.

Income Statement Explanation

You can also call the income statement the statement of earnings, profit and loss statement, or P&L statement. It is often divided into two sections: operating and non-operating. The operating income definition is the revenues and expenses incurred over the course of regular business operations. Then the non-operating income section shows the revenues and expenses incurred from activities that are not considered regular business operations. There may also be a section for irregular items, consisting of revenues or expenses from abnormal or nonrecurring activities. The top line of the income statement is the company’s operating revenues. The bottom line is the company’s net profit or loss.

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Income Statement Example

For example, James has started a company called Industryco. Industryco is a niche-specific telecom company. James, the founder and CEO of this Industryco, has a lot he is responsible for. For example, one responsibility of James is monitoring the income statements of the company. As a result, James, as with every month, sits down to perform income statement analysis.

First, he looks at the revenue sources of the company. The sales volume of various products and services of Industryco, multiplied by their associated price, make up these numbers.

Then, James looks at company expenses. Combine total costs to simplify the calculation of company profit. Profit, of course, is the motivation to conduct business in the first place. James is looking at the income statement, in the first place, to ensure the stability of company profit. Furthermore, this record allows him to do this with regards to a chosen time period.

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Income Statement definition

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Income Statement definition

Income Statement Template

A standardized income statement sample can be found at the Microsoft webpage. It serves as an excellent income statement template to customize for company needs.

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