What is a good operating margin for a business?

Identifying a good operating margin is highly sector-dependent. The capital structures, levels of competition and scale efficiencies are different from industry to industry. It is not particularly useful to compare the operating margin of a car parts manufacturer to a clothing retailer. Higher operating margins are generally better than lower operating margins, so it might be fair to state that the only good operating margin is one that is positive and increasing over time.

Operating margin is widely considered to be one of the most important accounting measurements of operational efficiency. It measures an organization's operating income, which is total revenue over an accounting period minus operating expenses, and divided by net sales. This ratio shows how much profit is earned for each dollar of sales. For example, an operating margin of 8% means that each dollar earned in revenue brings 8 cents in profit.

Whether or not that 8-cent figure is a good operating margin is mostly relative. Healthy companies make enough in profit to cover their fixed payments, expand operations and pay out dividends. However, investors are looking for companies that perform better than their competitors and have staying power. Volume is also critical; a company that sells 100 units a year probably needs a much larger operating margin than a company that sells 10,000 units a year.

Since the particular economics of each industry is different, comparing operating margins should only be done between competitors. The margin for each company should also be reviewed over time to understand longer-term trends in business management. The best uses of the operating margin, at least for investors, center around competitive and historical context.

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