The operating margin measures the profitability of a company’s core operations and indicates the percentage of revenue that remains after deducting operating expenses.
Page written by Ian Hawkins. Last reviewed on July 17, 2024. Next review due April 1, 2025.
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Operating margin represents the percentage of revenue that remains after deducting the direct costs of running a business. It’s a key indicator of how efficiently a company can generate profit from its core operations.
You can calculate operating margin with the following formula:
Operating margin = (Operating income / Revenue) x 100
A higher operating margin indicates effective cost management and a strong profit generation from primary business activities. A lower margin might suggest inefficiencies or intense competition within the industry.
Let’s say company XYZ has generated $1,000,000 in revenue. after deducting all operating expenses, the company has an operating income of $300,000.
Now we calculate the operating margin:
Operating margin = ($300,000 / $1,000,000) x 100% = 30%
Therefore, company XYZ’s operating margin is 30%. this means for every dollar of revenue, the company retains 30 cents as operating profit after covering all operating expenses.
Operating margin is a vital metric for comparing the financial performance of companies within the same industry. It provides insights into how well companies manage their costs. Investors often use it to evaluate a company’s ability to generate profit from its core operations. A consistent and healthy operating margin is usually a positive sign for potential investors.
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