Operating Margin

Operating Margin is a financial metric that measures the percentage of Revenue that remains after covering Operating Expenses, excluding interest and taxes. It is calculated by dividing operating income by total revenue, expressed as a percentage. A higher operating margin indicates a more profitable company, as it shows how efficiently a business is managing its core operations.

Formula: Operating Margin = (Operating Income / Total Revenue) x 100

Example 1: If a company has an operating income of $200,000 and total revenue of $1,000,000, the operating margin would be:

Operating Margin = (200,000 / 1,000,000) x 100 = 20%

Example 2: If another company has an operating income of $500,000 with total revenue of $2,500,000, the operating margin would be:

Operating Margin = (500,000 / 2,500,000) x 100 = 20%

Case: A retail company may have higher operating margins compared to a manufacturing company due to lower operating expenses and higher sales volume. For instance, a retail company might achieve an operating margin of 15%, while a manufacturing firm could be at 10% due to higher costs in production and materials.