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(Excerpted from Financial Intelligence, Chapter 20 – Profitability Ratios)
Operating margin can be a key metric for managers to watch, and not just because, many companies tie bonus payments to operating margin targets. The reason is that nonfinancial managers don’t have much control over the other items – interest and taxes – that are ultimately subtracted to get net profit margin. So operating margin is a good indicator of how well managers as a group are doing their jobs.
A downward trend line in operating margin should be a flashing yellow light. It shows that costs and expenses are rising faster than sales, which is rarely a healthy sign. As with gross margin, it’s easier to see the trends in operating results when you’re looking at percentages rather than raw numbers. A percentage change shows not only the direction of the change but how great a change it is.
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Operating Profit Margin
Definition
Operating profit margin (also called operating margin or operating margin percentage) reflects the profitability of the operations of the business. It is how much out of every sales dollar is left to cover non operating expenses, such as interest and taxes.
Example
Operating profit margin is calculated by dividing operating profit (also called EBIT) by revenue:
For example, if a company’s operating profit was $1,200 and its revenue was $12,000, then its operating profit margin is 10%.
Book Excerpt
(Excerpted from Financial Intelligence, Chapter 20 – Profitability Ratios)
Operating margin can be a key metric for managers to watch, and not just because, many companies tie bonus payments to operating margin targets. The reason is that nonfinancial managers don’t have much control over the other items – interest and taxes – that are ultimately subtracted to get net profit margin. So operating margin is a good indicator of how well managers as a group are doing their jobs.
A downward trend line in operating margin should be a flashing yellow light. It shows that costs and expenses are rising faster than sales, which is rarely a healthy sign. As with gross margin, it’s easier to see the trends in operating results when you’re looking at percentages rather than raw numbers. A percentage change shows not only the direction of the change but how great a change it is.
< Return to Finance Concepts List