Operating Margin

Finance

Quick Definition

Operating Margin is a profitability ratio that shows the percentage of revenue left after covering operating expenses, but before interest and taxes.

Detailed Explanation

Operating Margin measures how efficiently a company manages its core business operations. It is calculated using Operating Profit (EBIT) and revenue.

A higher operating margin indicates better cost control and operational efficiency.

Formula

👉 Operating Margin = (Operating Profit / Revenue) × 100

Where Operating Profit = Revenue – Operating Expenses

Why Operating Margin Matters

  • Shows operational efficiency
  • Helps compare companies in same industry
  • Indicates cost management

Operating Margin vs Other Margins

  • Gross Margin: After cost of goods sold
  • Operating Margin: After operating expenses
  • Net Margin: After all expenses including tax

Interpretation

  • High Margin: Strong operational performance
  • Low Margin: High costs or weak pricing power

Example

"If a company has revenue of ₹10 lakh and operating profit of ₹2 lakh: 👉 Operating Margin = 20%"

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