Interest revenues and expenses are not used when calculating operating profit margin because of what the metric is designed to show about a company.

The operating profit margin indicates the percentage of a company's revenue that is left over once all of its fixed and variable production and overhead costs have been paid. Healthy operating margins are essential for a company to remain financially sound and to have the necessary capital to expand its market and grow its business. The operating profit margin is equal to the operating income divided by net sales.

Looking at the operating margin of a company allows investors and analysts to determine how effective the company's management is at controlling operational costs and generating consistent income from doing business. Higher profit margins usually indicate that a company is doing an better job of keeping costs down, or that the company is managing to increase sales and profits at a rate that is more than sufficient to cover increases in operational costs. Operating margin is best evaluated in comparison with the operating margin of similar companies in the industry and in relation to other profitability ratios and equity valuation measures.

Operating profit is used to evaluate how well a company controls costs, but interest rates are a cost factor outside of a company's control. Interest revenues are excluded because operating margin assesses a company's performance in relation to its primary business. For most companies, interest revenues are a secondary income source, often unrelated to the company's main business.

Operating profit margin is considered to be a very important equity evaluation metric because it is less subject to distortion than net profit margin. Net profit margin can be significantly skewed, positively or negatively, by extraordinary events, such as selling off a subsidiary or incurring a large, one-time expense. Net profit figures are more easily manipulated than operating profit figures.

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  2. What is considered a healthy operating profit margin?

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  5. What is the difference between operating income and operating profit?

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