What Does Operating Margin Mean?
A ratio used to measure a company's pricing strategy and operating efficiency. It is calculated as shown here:
Operating margin is a measurement of the proportion of a company's revenue that is left over after variable costs of production such as wages, and raw materials have been paid. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. Also known as operating profit margin and net profit margin.
Investopedia explains Operating Margin
The operating margin gives analysts an idea of how much a company makes (before interest and taxes) on each dollar of sales. In evaluating the quality of a company, it is best to look at the change in operating margin over time and compare the company's yearly or quarterly figures with those of its competitors. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better. For example, if a company has an operating margin of 12%, that means that it makes $0.12 (before interest and taxes) for every dollar of sales. Often, nonrecurring cash flows such as cash paid out in a lawsuit settlement are excluded from the calculation of operating margin because they do not represent a company's true operating performance.
Related Terms:
• Contribution Margin
• Net Sales
• Operating Income
• Operating Leverage
• Revenue
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