Operating Margin

AAA

DEFINITION of 'Operating Margin'

A ratio used to measure a company's pricing strategy and operating efficiency.

Calculated as:


Operating Margin

Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.

Also known as "operating profit margin" or "net profit margin".

INVESTOPEDIA EXPLAINS 'Operating Margin'

Operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. When looking at operating margin to determine the quality of a company, it is best to look at the change in operating margin over time and to compare the company's yearly or quarterly figures to those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.

For example, if a company has an operating margin of 12%, this means that it makes $0.12 (before interest and taxes) for every dollar of sales. Often, nonrecurring cash flows, such as cash paid out in a lawsuit settlement, are excluded from the operating margin calculation because they don't represent a company's true operating performance.

For more information on this topic, check out Analyzing Operating Margins

VIDEO

Loading the player...
RELATED TERMS
  1. Pretax Profit Margin

    A company's earnings before tax as a percentage of total sales ...
  2. EBITDA Margin

    A measurement of a company's operating profitability. It is equal ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the ...
  4. Variable Cost

    A corporate expense that varies with production output. Variable ...
  5. After-Tax Profit Margin

    A financial performance ratio, calculated by dividing net income ...
  6. Contribution Margin

    A cost accounting concept that allows a company to determine ...
RELATED FAQS
  1. How much of the global beverage industry is controlled by Coca Cola and Pepsi?

    Approximately 60% of the global nonalcoholic beverages industry is controlled by Coca-Cola and Pepsi. Of this 60%, the split ... Read Full Answer >>
  2. What metrics are commonly used to evaluate companies in the food and beverage sector?

    Some of the key metrics most commonly used to evaluate companies in the food and beverage sector are profitability measures, ... Read Full Answer >>
  3. What metrics are most commonly used to evaluate companies in the electronics sector?

    Some of the equity evaluation measures most frequently used by investors interested in the electronics sector include gross ... Read Full Answer >>
  4. Which key performance indicators (KPIs) indicate that a business is successfully ...

    There is no specific list of key performance indicators (KPIs) that can be universally applied to any business. The selection ... Read Full Answer >>
  5. What is considered a healthy operating profit margin?

    Generally speaking, an operating profit margin of approximately 25% or better is considered favorable by most market analysts. ... Read Full Answer >>
  6. Should I look at a company's operating profit or net profit?

    When evaluating a company, look at both the operating profit margin and the net profit margin to obtain a more complete picture ... Read Full Answer >>
  7. What other investment metrics are best used in conjunction with net margin?

    Some of the metrics that are best used in conjunction with net margin include the operating profit margin, the price to book ... Read Full Answer >>
  8. What is the best timeframe to use when evaluating return on sales (ROS)?

    The return on sales, or ROS, ratio is best viewed on a year-to-year basis and examined for trends over a period of time. ... Read Full Answer >>
  9. What is the average profit margin for a company in the railroads sector?

    When examining average profit margins for companies in the railroad industry, it is important to consider both net profit ... Read Full Answer >>
  10. What metrics can be used to evaluate companies in the forest products sector?

    The forest products sector is composed of companies in the paper products and timber industries. The nature of paper products ... Read Full Answer >>
  11. What is the difference between operating margin and contribution margin?

    Operating margin is one of the three main measures of overall profitability for a company that analysts consider, whereas ... Read Full Answer >>
  12. What costs are not counted in gross profit margin?

    There are three progressively more inclusive and accurate measures of a company's profitability: gross profit margin, operating ... Read Full Answer >>
  13. What is the difference between operating margin and return on sales?

    Typically, the only differences between a company's operating margin and its return on sales, or ROS, come down to semantics ... Read Full Answer >>
  14. What is the difference between operating margin and EBITDA

    Operating margin and EBITDA – which stands for "earnings before interest, taxes, depreciation and amortization" – are two ... Read Full Answer >>
  15. How is gross profit margin used in sales?

    The gross profit margin is a baseline profitability ratio measurement against total sales revenue. The gross profit margin ... Read Full Answer >>
  16. What is the difference between operating margin and profit margin?

    There are three common profit margin measures used to evaluate a company's financial condition and prospects for growth. ... Read Full Answer >>
  17. What is the difference between gross profit margin and operating profit margin?

    Gross profit margin and operating profit margin are two commonly used measures of profitability. The difference between them ... Read Full Answer >>
Related Articles
  1. Investing

    Zooming In On Net Operating Income

    NOI is a long-run profitability measure that smart investors can count on.
  2. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  3. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  4. Fundamental Analysis

    Analyzing Operating Margins

    Find out how to put this important component of equity analysis to work for you.
  5. Personal Finance

    A Primer On The Railroad Sector

    The railroad industry might seem antiquated, but it remains an important service that reaches all corners of the country.
  6. Budgeting

    Use ROA To Gauge A Company's Profits

    Do you rely too heavily on ROE? Consider using return on assets for a more complete picture.
  7. Economics

    Understanding the Top Line

    Top line refers to a company’s gross sales without any reductions for discounts or returns.
  8. Fundamental Analysis

    Understanding Activity Ratios

    Activity ratios measure how effectively a business uses its assets.
  9. Fundamental Analysis

    Understanding Consolidated Financial Statements

    Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries.
  10. Fundamental Analysis

    Explaining the Common Size Income Statement

    A common size income statement expresses each account as a percentage of net sales.

You May Also Like

Hot Definitions
  1. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  2. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  3. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  4. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  5. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  6. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!