Operating Margin
Profit from core operations as a percent of revenue.
Formula
Variables
Example
Core profitability
How it works
Operating margin shows how much of each dollar of sales is left after paying the operating costs needed to run the business, before interest and taxes. It works by dividing operating income by revenue, so the result measures core operating profit relative to the size of sales. Multiplying by 100 turns the ratio into a percentage, making it easier to compare performance across periods or between companies of different sizes.
When to use it
Use this ratio when you want to judge how efficiently a company turns revenue into profit from its main business activities. It is especially useful for comparing similar firms, tracking performance over time, or spotting whether rising sales are actually improving profitability.
Worked example, step by step
Revenue = $850,000 Operating income = $119,000 OM = (Operating income / Revenue) × 100 OM = ($119,000 / $850,000) × 100 OM = 0.14 × 100 OM = 14% Final answer: The operating margin is 14%, meaning the business keeps $14 of operating profit for every $100 of revenue.
Common mistakes to avoid
- Using net income instead of operating income, which includes financing and tax effects
- Forgetting to multiply by 100, which leaves the answer as a decimal rather than a percentage
- Mixing up revenue with profit or using gross profit in the numerator instead of operating income
Did You Know?
Operating margin shows profit from core business before the noise of taxes and interest.
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More in Accounting
View allAccounting Equation
BasicThe foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.
Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
Gross Profit
BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
Net Income
BasicThe “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
Retained Earnings
BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.