Operating Earnings

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Definition of 'Operating Earnings'

Operating earnings, also known as operating profit or earnings before interest, taxes, depreciation, and amortization (EBITDA), is a measure of a company's profitability. It is calculated by taking a company's net income and adding back interest, taxes, depreciation, and amortization.

Operating earnings are important because they provide a more accurate picture of a company's profitability than net income. Net income includes non-operating expenses, such as interest and taxes, which can distort a company's true profitability. Operating earnings exclude these non-operating expenses, so they provide a better measure of how well a company is performing on a day-to-day basis.

Operating earnings are also used to calculate a company's return on equity (ROE). ROE is a measure of how effectively a company is using its shareholders' equity to generate profits. ROE is calculated by dividing a company's net income by its shareholders' equity.

A high operating earnings margin is generally considered to be a sign of a healthy company. A company with a high operating earnings margin is able to generate a lot of profit from its operations. This means that the company is efficient and is able to control its costs.

However, it is important to note that operating earnings are not the same as cash flow from operations. Cash flow from operations is a measure of the amount of cash a company generates from its operations. Operating earnings do not take into account a company's working capital requirements. A company with a high operating earnings margin may not have a high cash flow from operations if it has a high working capital requirement.

Overall, operating earnings are an important measure of a company's profitability. However, it is important to understand the limitations of operating earnings and to use other financial metrics to get a more complete picture of a company's financial health.

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