Operating Margin is a profitability ratio that measures the percentage of revenue remaining after covering operating expenses but before interest and taxes.
How It Works:
- Revenue from operations is calculated.
- Operating expenses are deducted.
- The remaining amount is operating profit.
- This is divided by revenue to derive the margin.
Benefits:
- Enables precise assessment of core business profitability independent of financing and tax structures
- Supports benchmarking against industry peers and competitors
- Enhances managerial decision making related to cost optimization and pricing strategies
- Provides investors with insights into operational efficiency and sustainability
Example:
A company with revenue of ₹10,00,000 and operating profit of ₹2,00,000 has an operating margin of 20 percent.