Determine the percentage of revenue left after covering operating expenses
Revenue & Costs
Operating Margin
0%
What is Operating Margin?
Operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, but before paying interest or tax. It is calculated by dividing Operating Income (EBIT) by Total Revenue. This ratio is a strong indicator of how well a company is managed and how efficient it is at generating profit from its core operations.
- Core Profitability: Unlike Gross Margin, Operating Margin includes "hidden" costs like marketing and office rent, giving a truer picture of business health.
- Benchmarking: Investors compare operating margins of companies within the same industry to see which one is more "lean" and efficient.
- Operational Leverage: A rising operating margin suggests that the company's costs are growing slower than its sales, which is a sign of a scalable business.
How is this different from Gross Margin? +
Gross Margin only subtracts direct production costs (COGS). Operating Margin goes further and subtracts all daily running costs like rent, marketing, and staff salaries.
What is a "Good" Operating Margin? +
It varies. Software companies often have margins above 30%, while retail stores or restaurants might operate on 5-10%. High-volume businesses usually have lower margins.
Does this include interest on loans? +
No. Operating margin only looks at "Operations." Interest and Taxes are subtracted later to find the "Net Margin."
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