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Operating margin and profit margin both measure the efficiency of a firm by comparing profits against costs at three different spots on an income statement. On their own, these margins do not tell much of a story, but they are very useful when compared to past periods or to competitor firms in the same industry. The differences between profit margin and operating margin can be telling and can help a firm identify potential areas of waste.

Profit Margin

There are two types of profit margin: gross profit margin and net profit margin. Gross profit margin reflects the relationship between gross sales revenue and cost of goods sold, ignoring other variables that may have less to do with selling merchandise. Net profit margin takes into consideration the costs of taxes and interest payments, and it provides a more detailed view of financial health than gross profit margin.

Both metrics highlight how much of each dollar in revenue is kept as earnings, and they can be very useful in comparing companies.

Operating Margin

Operating margin takes a wider look at costs than profit margin. By taking into account variable costs, such as wages, operating margin is a better reflection of the effectiveness of the company's overall pricing strategy. Unlike net profit margin, operating margin does not consider interest expenses.

Comparing Operating and Profit Margin

If there is a huge discrepancy between a company's profit margin (particularly its gross margin) and its operating margin, it suggests that the company is more efficient in creating and selling its products, but perhaps less efficient in managing training, administration, research or other day-to-day business costs.

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