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Overview of Net Operating Income (NOI)
Definition of
Net Operating Income (NOI)
What is Net Operating Income (NOI)? Net Operating Income (NOI), also commonly referred to as Operating Income or Operating Profit, is a measure of a company's profitability from its core business operations. It is calculated before deducting interest expense and income taxes. The formula is typically: NOI = Revenue - Cost of Goods Sold (COGS) - Operating Expenses, or alternatively, NOI = Gross Profit - Operating Expenses. NOI is a key figure on the Income Statement as it indicates how well a company is generating profit from its primary activities.
Activities Related to
Net Operating Income (NOI)
Here is a list of NOI related activities:Â
Calculating total operating revenues, Determining Cost of Goods Sold (COGS), Identifying and summing all operating expenses (such as selling, general, and administrative expenses), Applying the NOI formula, Analyzing operational profitability and efficiency, Comparing NOI to previous periods or industry benchmarks, Using NOI for budgeting and forecasting operational performance, and Making decisions about operational improvements or cost controls.
NOI is a crucial metric for assessing the performance of a company's core business activities.
The Importance of
Net Operating Income (NOI)
Net Operating Income (NOI) is important because it provides a clear view of a company's ability to generate profit from its main business activities, without being distorted by financing decisions (interest) or tax strategies (taxes). This makes it a useful metric for comparing the operational performance of different companies within the same industry. For business owners, NOI helps in assessing the efficiency of their operations and the profitability of their core offerings. It is also a key input for many financial ratios and valuation models, particularly in real estate where NOI is used to determine the value of income-generating properties. It's a step before calculating Net Income.
Key Aspects of
Net Operating Income (NOI)
Focus on Core Operations
Measures profitability derived solely from a company's regular, ongoing business activities.
Excludes Interest and Taxes
Calculated before deducting interest expense and income tax expense, providing a picture of operational earning power.
Indicator of Operational Efficiency
Helps assess how well a company manages its revenues and operational costs.
Synonymous with Operating Profit/Income
Often used interchangeably with "Operating Profit" or "Operating Income" and is similar to Earnings Before Interest and Taxes (EBIT), although specific calculation details can sometimes vary slightly.
Concepts Related to
Net Operating Income (NOI)
Net Operating Income (NOI) is a key subtotal on the Income Statement. It is derived from Gross Profit by subtracting Operating Expenses. NOI is a component used to calculate overall Net Income. It is often compared to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), though EBITDA adds back depreciation and amortization to operating income.
Net Operating Income (NOI)
in Action:
The Adventures of Coco and Cami
Coco and Cami want to see how profitable their actual sandwich and coffee selling operations are, before considering things like loan interest or income taxes.
Professor A explains Net Operating Income (NOI), showing them how subtracting all their direct operating costs from their sales revenue gives them a clear picture of their core business profitability.