Operating Profit Margin

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Operating Profit Margin

Operating Profit Margin =

Operating income

Sales

AKA: operating income margin, operating profit margin, EBIT margin, and return on sales.

INTERPRETATION

The operating margin is the percentage of profit a company makes on a dollar of sales after accounting for wages, raw materials, and other variable costs but before paying interest or taxes.

Business owners, managers, and others use this ratio to determine a company’s operating profit and as an indicator of management’s abilities. The ratio is also used to determine if fixed costs are too high for the production volume.

Note: expanded calculation

Gross profit minus operating expenses, divided by sales revenue, multiplied by 100% to express as a percentage.

EXAMPLE

At the end of the period, M&M Company calculated its operating profit to be $72,000, recognizing a $300,000 sale revenue. M&M Company had an operating margin ratio of 0.24 or 24% in this case.

For every dollar of revenue, only 24 cents remain after the operating expenses have been paid. The 76-cent balance covers variable costs, while all other non-operating or fixed costs are paid with the 24 cents left.

BENCHMARK: PG, HA, ROT

A healthy operating margin is positive; if it’s 0, the company is breaking even. If it’s a negative number, the company operates at a loss.

When evaluating a company’s operating margin, be aware that the margin depends on what sector the company is in and macro trends affecting margins. Ideally, most companies want an operating margin of 15% or more. A 10% margin is considered average. But, generally speaking, a high operating margin indicates that a company is well-managed and is less risky than other companies with lower operating margins.

Operating Profit Margin:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

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