What is Operating Margin
Operating margin is a percentage that measures the number of profits that the company earned per dollar of sales after expenses. The operating margin reflects the percentage of the total profit generated from net sales. In other words, it is the percentage of profit left after all deducted by expenses.
The operating margin is the comparison between operating income (EBIT) and net sales as a percentage value. Thus, the higher percentage of the operating margin means the more profit that the company generated profit from sales. For example, 20% of the operating margin means the company receives 20 cents of profit on each dollar of sales.
To determine the operating margin, the first step is to calculate the company’s net income (net income) by subtracting not only the cost but also all other operating expenses such as insurance and taxes from the revenue. To put it simply, the operating margin is the percentage of revenue remaining after deducting all operating expenses, interest, and taxes from a company’s total revenue.
Therefore, the operating margin uses to measure how well your business generates revenue from normal business operations after spending on marketing, sales, product development, and so on. This is the reason why the lower percentage of the operating margin sometimes indicates the company’s cost management issue.
Note: The operating margin is also known as the return on sale (ROS) and the profit margin.
Operating Margin Formula
The operating margin can be calculated by dividing the operating income which is also known as the earnings before interest and tax (EBIT) by the company’s revenue, or by the following operating margin formula:
Operating margin = (Operating income / Revenue) x 100
or
Operating margin = (EBIT / Net sales) x 100
The result of the ratio is expressed as a percentage value.
Where:
- Operating income is the company’s earnings before interest and tax (EBIT).
- Revenue is the value of the sales in a period, also known as the Net Sales.
For example, let’s say the Feriors earns $20,000 before interest and tax, and the net sales of the company this year is $60,000:
- Operating margin = 20,000 / 60,000 = 33.33%
From the example, the company makes 33.33 cents on each dollar of sales. Conversely, every 66.34 cents on each dollar of sales is its cost.
FAQs
Operating margin is a percentage that measures the number of profits that the company earned per dollar of sales after expenses.
Operating margin = (Operating income / Revenue) x 100
The higher percentage of the operating margin means the higher profit that the company generated from sales.
