Table of contentsWhat is the operating margin? Operating margin definitionHow to calculate operating margin? Operating profit margin formulaThe limitations of the operating profit marginFAQs
With this operating margin calculator, we are here to help you calculate a company's operating profit margin. Operating margin is widely used to assess a company's operational efficiency. The higher the operating profit margin, the more efficient the company's operation.
We wrote this article to help you understand what operating margin is and how to calculate it using the operating margin formula. To assist you in understanding the concept, we will also demonstrate some operating margin calculation examples. Without further ado, let's start by understanding the operating margin's definition.
What is the operating margin? Operating margin definition
Operating margin, or operating profit margin, is defined as the operating profit divided by its revenue or sales. It helps investors to assess how much profit the business is able to retain through its operation. The higher the margins, the more profit the business is able to retain. That's why it is good to know how to find an operating profit margin. Please check our our revenue calculator and sales calculator to understand moron this topic.
The reason that operating margin is vital when assessing a company is that higher operating margins usually mean higher growth . The more profit the company can retain, the more money it can reinvest into its business. This will allow the company to invest more into research and development, thus producing better products than its competitors. The company also has more room to optimize its pricing strategies when its margins are high. For instance, a high-margin company can afford to lower its prices to drive sales away from its competitors.
Now that we are clear on what operating margin is, it's time to talk about the operating margin formula and show an example of what our operating profit margin calculator can do.
How to calculate operating margin? Operating profit margin formula
Let's take Company Alpha as our example. It reports the following information:
- Revenue: $10,000,000
- Cost of goods sold: $5,000,000
- Operating expenses: $2,500,000
Our operating margin calculator allows you to calculate the operating margin in two steps.
Calculate operating income
The first step is to calculate the
operating income. We can calculate using the formula below:
operating income = revenue - cost of goods sold - operating expenses
In our example,
$10,000,000 - $5,000,000 - $2,500,000 = $2,500,000.
Calculate operating margin
The next and final step is to calculate the
operating marginwith the operating profit margin formula below:
operating margin = operating income / revenue
operating marginof Company Alpha is
$2,500,000 / $10,000,000 = 25%.
Even if you now know how to calculate operating profit margin by hand, you can still use our operating profit margin calculator to do it much faster.
The limitations of the operating profit margin
After understanding how to calculate operating margin, we need to know more about the metric. Even though the operating margin is a powerful metric, it has several limitations as well:
- Operating margin does not take interest expenses into account, hence neglecting a company's financial leverage.
- Operating margin does not consider tax expenses. Thus, it is difficult to compare companies in different jurisdictions.
- Different industries have different dynamics and ways of operating. So, operating margin is only insightful when comparing companies within the same industry.
Taking the above into account, we cannot directly answer the question "What is a good operating profit margin?" without understanding the limitations first.
Can operating margin be negative?
Yes, the operating margin can be negative. This happens when the operating profit of a company is negative. This means that the company's operations are inadequate and inefficient.
How can a company improve its operating margin?
The most direct way of achieving a higher operating margin is to increase the company's sales or decreasing its operating expenses. Most companies achieve these by either aggressive marketing strategies or pursuing economies of scale.
What does operating margin measure?
Operating margin is one of the best metrics of measuring a company's operational efficiency. The higher the operating margin of a company, the more profit can be retained by the business.
Therefore it is good to know how to find an operating profit margin.
What is a good operating margin?
Different industries are characterized by different operating margins, so it is impossible to tell if an operating margin figure is good or bad without comparing it to its peers.
For instance, service businesses tend to have high operating margins, whereas transportation companies tend to have low operating margins.
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