A:

There are three common profit margin measures used to evaluate a company's financial condition and prospects for growth. Operating margin is one of the three measures. The other two are gross margin and net margin.

Operating margin is most easily understood through a brief explanation of all the various figures referred to by the term "profit margin." The first measurement of profit margin is more precisely called gross profit margin. Gross profit margin refers to the amount of sales revenue left over after subtracting the total cost of goods used in manufacturing the company's product(s). This is the most basic profit margin calculation, and it provides some estimate of a company's ability to control or minimize production costs.

The operating profit margin goes a step further by indicating the amount of revenue a company retains after factoring in all of its operational or overhead costs; in other words, its operating expenses as a company beyond the amount directly spent on goods or parts required to manufacture the company's products. Operational expenses include administrative costs, salaries, property or building costs, depreciation and all costs associated with marketing the company's products. Basically, operating margin includes all expenses except for interest paid on outstanding debt and all taxes the company is liable for paying.

Operating margin reveals how good a company is at controlling its total overall expenses and can be helpful in identifying areas where a company may be able to reduce costs and thereby increase its profit margin. Interest and tax figures not included in calculating the operating margin are included in the third measure of profitability, net profit margin, which shows the final amount of revenue after a sale.

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