Operating Cash Flow vs Net Operating Income: Whats the Difference?


It's a measurement of what money a company makes only looking at the strictly operational aspect of its company. Let’s consider Apple Inc.’s financial data from its 2022 annual report to calculate its net operating income. To improve NOI, the firm can increase revenue sources, reduce operating costs, or, in extreme cases, sell the property. Vacancy allowances are expressed as a percentage of rental income, and they simulate hypothetical “downtime” where the property may sit vacant for a period of time without any rental income. Vacancy allowances are a function of the geography and the property type, with smaller communities and higher risk property classes usually commanding a higher “hypothetical” vacancy rate.

  • Operating income is calculated by taking gross income and subtracting operating expenses, which include selling, general and administrative expenses (SG&A), depreciation and amortization.
  • As you can see, fuel costs skyrocketed in 2022, while other operating costs trended higher due to global inflation.
  • Operating income, also referred to as operating profit or Earnings Before Interest & Taxes (EBIT), is the amount of revenue left after deducting the operational direct and indirect costs from sales revenue.
  • The higher the revenues and the smaller the expenses, the more profitable a property is.
  • Net operating income (NOI) is a commonly used figure to assess the profitability of a property.

However, the analysis stops before reaching financial management items like taxes, interest expenses, depreciation, and amortization. Unless you're running a bank, those items are not part of your core business. You start the NOI calculation from gross profits (revenues minus cost of revenues) and then subtract the direct operating costs involved in earning that revenue. Net operating income is an important financial term -- one often misunderstood. There are many different sorts of income (also known as profits) on any company's income statement, and they all serve different purposes in your financial analysis. So let's get specific and dig into the details of net operating income, or NOI.

Operating Cash Flow vs. Net Operating Income: An Overview

Net operating income (NOI) is a profitability metric typically used in real estate to measure a property’s profit potential. Net operating income measures the amount of cash flow that a property generates after all expenses have been deducted or have been paid. When calculating NOI operating expenses are deducted from the property's total income. Those expenses can include the costs of running and maintaining the building and the grounds, such as insurance, property management fees, legal fees, utilities, property taxes, repairs, and janitorial fees. D Trump footwear company earned total sales revenues of $25M for the second quarter of the current year. As a result, the income before taxes derived from operations gave a total amount of $9M in profits.

NOI is not a percentage but rather a number that takes into consideration the revenues and expenses of a property. It can be compared to the entire value of the property if that property had been paid fully in cash. In this case, the higher the net operating income to property price percentage, the what is financial modeling skill better. Net operating income is revenue less all operating expenses while net income is revenue less all expenses, including operating expenses and non-operating expenses, such as taxes. The formula to determine the cap rate is the ratio between net operating income (NOI) and the property value.

Net operating income (NOI) is a calculation used to analyze the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. Net operating income (NOI) is a calculation used to analyze the profitability of real estate investments. It considers the overall revenue after deducting necessary operating expenses.

Capital Expenditures

Any real estate investor should have a few essential tools in their toolbox. Including a deep understanding of fundamental financial principles, thorough familiarity with the real estate market they like, and the ability to estimate remodeling expenses. However, it's important to analyze all areas of their financial statements to determine where a company is making money or losing money as in the case of J.C.

In particular, understand that the NOI metric is intended to capture profitability before any depreciation, interest, income taxes, corporate-level SG&A expenses, capital expenditures (Capex), or financing costs. NOI doesn’t include taxes, interest, depreciation, amortization, or capital expenditures. So it won’t provide all the information about an investment’s financial outlook. However, it does offer a quick, reliable way of understanding a property’s cash flow.

How To Calculate Net Operating Income

Sales revenue or net sales is the monetary amount obtained from selling goods and services to business customers, excluding merchandise returned and any allowances/discounts offered to customers. The image below represents Apple Inc's income statement for the three months ending June 25, 2022. It also represents the nine month period for the company through the end of Q3. One approach is top-down, one approach is a bottom-up approach, and one leverages cost accounting classifications.

Operating Income vs. Net Income

Operating income and net income both show the income earned by a company, but the two represent distinctly different ways of expressing a company's earnings. Both metrics have their merits, but also have different deductions and credits involved in their calculations. It's in the analysis of the two numbers that investors can determine where in the process a company began earning a profit or suffering a loss. Operating income is considered a critical indicator of how efficiently a business is operating. It is an indirect measure of productivity and a company’s ability to generate more earnings, which can then be used to further expand the business. Investors closely monitor operating profit in order to assess the trend of a company’s efficiency over a period of time.

Because this expense is not directly tied to operational functions of the company, this increase has no bearing on operational income (though it does factor into net income). When looking at a company's financial statements, revenue is often the highest level of financial reporting. Gross revenue is the total amount of revenue earned by a company for a given period, while net revenue is the total amount of revenue less any discounts, returns, or deductions to make from the total that was sold. Operating income is a measurement that shows how much of a company's revenue will eventually become profits considering its business operations.

Income taxes are excluded from the calculation because they depend on the investor and are not standardized across all properties. Property taxes, on the other hand, are included in the formula as they’re considered operating expenses. Knowing how to calculate net operating income accurately is one of the most crucial calculations for real estate investors (NOI). Real estate investors may quickly and easily make financial decisions thanks to this robust calculation.

Mainly, the company canceled out the higher fuel costs and airport charges by issuing lower salary increases to its staff than UPS did to theirs. For 2021 and 2022, the net operating income (NOI) of the real estate segment (RES) is $3,105 million and $3,688 million, respectively. The higher the NOI margin, the greater the proportion of property revenue converted into net operating income (NOI). On the other hand, a property with a negative NOI signifies the property is unprofitable, and thus costs more to operate the property than the amount it earns in income on behalf of the investor.

In other words, NOI aims to provide insight into the true cash flow of a property. Operating cash flow measures the cash that a company generates from its daily core business or operations. Operating cash flow is also known as cash flow from operations and is reported on the corporate cash flow statement. On the other hand, gross profit is the monetary result obtained after deducting the cost of goods sold and sales returns/allowances from total sales revenue. On its income statement, Apple reported $82.959 billion of product and service revenue, up very slightly from the prior year. However, looking further down its income statement, the company's operating income for the three-month period was $23.076 billion, less than the $24.126 billion from the year before.

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