Operating Income

For the purpose of valuation, the most essential component that needs to be calculated(For present year) and estimated(For future years) is the operating income. The best way to decided the operating income is not through the sales figure given in the profit and loss account. The best way is to visualize the operating income as constituting of those parts which are recurrent in nature.

This classification has been proposed by Mckinsey. They classify the income as recurring and non recurring. The recurring part of the income is due to day2day operations where as the non-recurring part is generally a one time event. Let us say for example Bajaj Auto, the company has 50% of its assets in investments so not considering the income from these investments would not be a good option as the income would be earned each year.

In short the rule is "If it is recurring, it is operating income"