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As an investor, you more than likely gravitate towards names of companies you’ve heard of.
These companies will be large, they’ll have a proven track record of growth, and they’ll generally provide you with a return over the long term.
While you may not dig deeply into the financial statement to find out the inner workings of a company’s financial anatomy, you may want to understand a few finance terms.
After all, Warren Buffet himself advised most people to invest in what they know.
One of the terms it would help to understand is operating revenue and how it relates to similar terms.
To understand a business you want to invest in, you first have to have a relatively detailed knowledge of exactly how it makes money. Operating revenue is one step to understanding this.
What is Operating Revenue?
Operating revenue is the money a company makes from its core business operations.
If you’re investing in Dell, it would help to understand that their operating revenue is generated by selling computers.
If you’re investing in Costco, it would help to understand that their operating revenue comes from consumer sales.
There are several types of revenue a company’s financial report will show. Operating revenue is, of course, one of them, but there is also non-operating revenue.
Non-operating revenue is money a company makes from activities not related to its core business.
Large companies own many, many things that help them conduct their core business. Dell has factories, office buildings, outlets, assembly lines, and other real estate assets.
They also have over $14 billion in cash on hand. When you have that kind of cash, you don’t keep it in printed cash in a vault somewhere – you keep it in a bank.
Even at a rate of 0.25%, that’s $35 million of interest income per year! It’s usually not quite as simple as that, but this is reported as non-operating revenue.
Look at a company’s consolidated statements of income. You will see the dramatic difference between operating revenue and operating income.
The revenue is the total money made from their core business, while the income is profits after the costs of generating that revenue (buying products, manufacturing, etc.) are deducted.
Examples of Operating Revenue
Operating revenue can be confusing because some businesses offer other services that don’t contribute to a majority of profits.
Here are some examples of entities that have a few different revenue streams but very clear operating revenue.
- A real estate company generates revenues by collecting rent from a portfolio of real estate assets. It also generates revenue by selling properties that have increased in value to reflect capital gains. While both generate returns and require overhead, collecting rents produces a vast majority of the company’s revenues. Hence this is reported as operating revenue.
- Law firms or other consulting firms generate revenue by charging clients by the hour for consulting services. They also might sell software that lets their customers track filing requirements and access legal documents for taxes, patents, etc. However, since most of their revenues come from client billing, this is reported as operating revenue.
- A car manufacturer owns several patents on automotive inventions that require licensing from other manufacturers that wish to use similar ideas or buy parts for repairs. They also make money by selling other parts and equipment to local dealers to work on their cars. However, the car manufacturer’s operating revenues are generated by selling new, finished cars to dealers or other companies with direct contracts.
Operating Revenue vs. Operating Income: What Is the Difference?
Operating revenue can sometimes be confused with operating income.
We mentioned it briefly earlier. However, we’ll point out an important distinction: revenues are generally money brought in before any deductions, and income is generally the same as profit and represents money the company makes after deductions.
These two pieces of information are important to understand a business.
These two numbers are relatively close together in a perfect world, but generating profits requires some overhead. More simply stated, it takes money to make money.
Let’s look at Costco to prove a point. Their 2020 operating revenue was a massive $163.22 billion from the sale of merchandise to customers.
However, the costs of purchasing the products to sell amounted to $144.939 billion! If you add in the administrative and general overhead of $16.332 billion, Costo’s operating income, or profit, on their operating revenue is only $1.949 billion.
However, as we all know, Costco charges annual membership fees. The revenue from membership fees was $3.541 billion without much overhead associated with it.
This represents a majority of Costco’s profit, but their operating revenue and operating income are still focused on selling merchandise to customers.
Wall Street’s Perspective on Operating Revenue vs. Operating Income
Wall Street is generally concerned with the recent trend of these two numbers. There will be an uptrend in both numbers for the strongest companies over the course of several years.
Stock prices will be affected positively if the company finds some way of reducing expenses to decrease the distance between operating revenues and profits.
In other words, if operating revenue stays the same but operating income increases, this generally sees the stock price increase as the company is keeping more of the money it makes.
The assumption is that this will continue for the foreseeable future.
Non-Operating Revenue Examples
To reiterate the differences between operating and non-operating by looking at the examples, we mentioned previously.
- For the real estate company, the revenues from selling real estate assets would be reported as non-operating revenues
- The law firm’s non-operating revenues would include revenues from the sale of the software to clients. They may have some other value-added services that aren’t charged at the normal hourly rate. These would also be non-operating income.
- The car manufacturer’s income from patent-related and parts sales would also be non-operating income.
Bottom Line: What Is Operating Revenue?
Operating revenue is a critical component of a company’s financial report because it represents the core method a company uses to generate profits.
However, it’s important to note that operating revenue must be compared with other reported figures like operating income to better understand a company’s financial health.