Operating margin is a profitability ratio that measures how much operating profit is generated from a company’s total revenue. It indicates how well a company controls operating expenses to run its core business.
- Operating margin = Operating profit / Total revenue x 100
Operating profit refers to earnings before interest and taxes are deducted. It shows profit from core business operations alone.
Total revenue includes all income from the sale of goods/services before any costs are deducted.
A higher operating margin indicates greater efficiency and better cost management in areas like production, inventory, fulfillment, overhead etc.
For example, if a company earns $10M operating profit on $100M total revenue, its operating margin is 10%.
Tracking operating margin together with net profit margin provides a more holistic view of financial health by separating core operations from financing costs.