operating margin
Operating income divided by revenue, representing the percentage of revenue remaining after paying operating costs but before interest and taxes.
Example
“With revenue of $100M and operating income of $20M, the company had a 20% operating margin.”
Memory Tip
OPERATING margin = profit from OPERATIONS before interest and taxes.
Why It Matters
Operating margin helps you understand how efficiently a company manages its core business operations. When evaluating investments or choosing between companies, a higher operating margin indicates better cost control and profitability, which can affect stock performance and dividend payments that matter to your portfolio.
Common Misconception
Many people confuse operating margin with net profit margin, thinking they are the same thing. However, operating margin excludes interest expenses and taxes, while net profit margin includes all expenses, so operating margin is always higher and does not show the true bottom-line profitability.
In Practice
If a retail company generates 10 million dollars in revenue and has 7 million dollars in operating income after paying for inventory, salaries, and store rent, its operating margin would be 70 percent. This means 70 cents of every dollar in sales remains to cover interest on debt and taxes before reaching net profit.
Etymology
OPERATING (from ongoing business) MARGIN (edge between revenue and cost).
Common Misspellings
Small business accounting made simple
Related Terms
More in accounting
Other accounting terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.