Operating Margin


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Operating margin formula is:

 Operating margin formula



Definitions and terms used in Operating Margin Calculator

Net Sales
The amount of revenue generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed.
Net sales = Gross sales – Sales returns and allowances
Cost of Goods Sold (COGS)
The direct cost attributable to the production or purchasing of the goods sold by a company. It is also referred as Cost of sales.
Gross Profit
The difference between Net Sales and its Cost of Goods Sold, before deducting overhead, payroll, taxes, interest and other operating expenses.
Gross profit = Net sales – Cost of Goods Sold
Operating Expenses
The expenses incurred by a business in its normal day-to-day operations, but not directly associated with production of goods. Operating expenses include payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs etc. These expenses are divided into selling expenses and administrative and general expenses.
Operating Income
A measure of a company’s profitability that excludes interest and income tax expenses. This is the surplus generated by operations and equals gross profit less all operating expenses.
Also known as Earnings before Interest and Taxes – EBIT
Operating Income = Gross profit – Operating Expenses

What is Operating Margin

Operating margin or operating profit margin measures what proportion of a company’s revenue is left over, after deducting direct costs and overhead and before taxes and other indirect costs such as interest.

Operating margin formula is:

 Operating margin formula

Operating margin is used to measure company’s pricing strategy and operating efficiency. It gives an idea of how much a company makes (before interest and taxes) on each dollar of sales.

Operating Margin Analysis

Operating margin ratio shows whether the fixed costs are too high for the production or sales volume.

High or increasing operating margin is preferred because if the operating margin is increasing, the company is earning more per dollar of sales.

Operating margin can be used to compare a company with its competitors and with its past performance. It is best to analyze the changes of operating margin over time and to compare company’s figure to those of its competitors.

Operating margin shows the profitability of sales resulting from regular business. Operating income results from ordinary business operations and excludes other revenue or losses, extraordinary items, interest on long term liabilities and income taxes.