Definition
Operating Margin
Operating margin is the percentage of revenue left as operating profit after deducting the costs of running the core business.
Operating Margin = Operating Profit (EBIT) / Revenue. It shows how efficiently a company converts sales into profit before interest and tax, isolating the health of the core operations from financing and one-off items.
Rising operating margins suggest improving efficiency, pricing power, or operating leverage; falling margins flag cost pressure or competition. Comparing margins across peers and over time is central to fundamental analysis of a company's quality and trend.
Related terms
- Return on Capital Employed (ROCE)ROCE measures operating profit relative to all capital used, both equity and debt, showing how efficiently a company generates returns from its total funding.
- EBITDAEBITDA is earnings before interest, tax, depreciation, and amortisation, a measure of a company's core operating profitability.
- Operating LeverageOperating leverage is the degree to which a company's profits rise or fall with sales, driven by its mix of fixed versus variable costs.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.