Profit from the core business before interest and tax: gross profit minus operating expenses. Often written EBIT.
Operating income strips out how the company is financed and how it is taxed, so it compares two businesses on operations alone. It is the numerator of operating-margin and the profit figure used in ev-ebit and most return-on-invested-capital calculations.
EBIT and operating income are usually the same number, though EBIT technically starts from net-income and adds back interest and tax, which can pick up non-operating items that a strict operating income line excludes.
Example: Northwind Tools has gross profit of $370M and operating expenses of $250M, so operating income is $120M and operating margin is 14.3%. Interest of $18M and tax of $24M then take it to $78M of net income.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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