Operating Margin: What Is It?

The operating income ratio to net sales revenue stated as a percentage is known as the operating margin. Operating margin is often referred to as return on sales and operating profit margin. It displays the amount of active income produced for every dollar of sales revenue.

An intermediary item on a company's income statement is operating income. The profit (or loss) from net sales after subtracting COGS and operational expenditures is known as operating income (or loss).

The "common size" statistic, which is generated from operating income, is the operating margin. Comparing businesses of various sizes is simpler when standard size measures are stated as percentages of revenue.

Operating Margin Calculation

Net sales revenue and operating income are two more crucial financial indicators that go into calculating operating margin. The income statement of a corporation contains all the necessary data.

Mainly when performing a comparison study, it is crucial to have precise data created using consistent accounting techniques. Businesses can compute operating margins over any time, including monthly, quarterly, or yearly.

In addition, businesses frequently determine the operating margin for particular company divisions and product categories.

They may compare the profitability of various corporate divisions regarding this.

What is Operating Income?

By definition, non-operating income and costs, which are produced by non-operating activities and one-time profits and losses, are not included in operating income.

For instance, investment income, one-time payments, earnings on the sale of equipment, intangible asset impairment, and financing charges are not included in operating income. Another significant deduction from operating income is income tax.

Operating income may be the same as earnings before interest and taxes if a business has no non-operating operations (EBIT). The following calculations can be used to determine operating income:

1. Net Sales Revenue - COGS - Operating Expenses= operating income.

The formula for Operating Margin

To calculate the operating margin, divide operating income by net sales and then multiply the result by 100. It goes like this:

operating margin= Operating Income / Net Sales Revenue x 100

For example, a business reported $100 million in net sales revenue on its 2020 annual income statement. Operating income for the year was $40 million due to $60 million in COGS and $60 million in operating costs. 40% ($40 million/$100 million x 100) is the operating margin.

FINAL INSIGHT

One of the three commonly used profit ratio measurements is operating margin. The gross margin and net profit margin are the other two. Each of these measures offers a unique viewpoint on an organization's operations.

Operating margin primarily demonstrates how well a corporation profits from its core activity after paying for fixed and variable expenditures. These gains may be reinvested in the firm or utilized to finance expansion.

The operating margin of a corporation is a reliable measure of its management effectiveness. Generally, a well-managed business performs an excellent job of generating income while reducing expenditures in administrative wages and rent, which are frequently significant portions of operational expenses.

It might indicate a company's overall health and competitiveness if it consistently increases its operating margin.