Operating Margin
Operating margin is operating income divided by revenue, showing what share of sales remains as profit from core operations.
Operating margin measures how much profit a company makes from its core business for every dollar of revenue, after paying both production costs and operating expenses such as salaries, rent, marketing and research, but before interest and taxes.
The formula is operating income divided by revenue, times 100.
Example: a company has revenue of $2 billion and operating income of $300 million. Its operating margin is 15%, meaning it keeps 15 cents of operating profit from each dollar of sales.
Because it excludes interest and taxes, operating margin is useful for comparing how efficiently different companies are run, even if they have different levels of debt or operate in different tax jurisdictions. It is also a good indicator of operating leverage: in businesses with high fixed costs, margins can expand quickly when sales grow and shrink just as quickly when sales fall.
Typical operating margins vary widely by industry, so comparisons within a sector are most meaningful. Watching the trend over several years often says more than a single number. Companies sometimes report adjusted operating margins that exclude certain costs, which are not standardized.