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.

RELATED FAQS
  1. What is the difference between operating margin and contribution margin?

    Understand the difference between two measures of profitability, operating margin and contribution margin, and the purpose ... Read Answer >>
  2. What's the difference between profit margin and operating margin?

    Find out the differences between a company's gross profit margin, net profit margin and operating margin, and what each metric ... Read Answer >>
  3. What is the difference between gross profit margin and operating profit margin?

    Understand the difference between gross profit margin and operating profit margin, two measures of corporate profitability ... Read Answer >>
  4. What costs are not counted in gross profit margin?

    Explore the various measures of a company's profitability, such as gross, operating and net profit margins, and understand ... Read Answer >>
  5. What types of financial margins should investors pay the most attention to before ...

    Learn what types of financial margins, such as profit and cash margins, an investor should pay the most attention to before ... Read Answer >>
Related Articles
  1. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  2. Small Business

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  3. Investing

    What is Net Margin?

    The ratio of net profits to revenues for a company that shows how much of each dollar earned by the company is translated into profits.
  4. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  5. Investing

    Buying on Margin

    When an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
  6. Investing

    Explaining Initial Margin

    Initial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
  7. Investing

    Contribution Margin

    Contribution margin is a cost accounting concept that allows a company to determine the profitability of individual products.
RELATED TERMS
  1. Profit Margin

    Profit margin is part of a category of profitability ratios calculated ...
  2. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  3. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
  4. Margin

    1. Borrowed money that is used to purchase securities. This practice ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  6. Profitability Ratios

    A class of financial metrics that are used to assess a business's ...
Hot Definitions
  1. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  2. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  3. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  6. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
Trading Center