Operating profit margin, also known as operating margin, is a comparison of a company's operating income to revenue in a given period. The formula for calculating it is simple.
Operating profit is what remains after all costs of goods sold and operating expenses are removed from revenue in a given period. Operating expenses encompass all of the costs incurred for selling, general and administrative functions of the company. If revenue equals $2 million and COGS plus SG&A expenses equal $1.25 million, for example, operating profit is $750,000. To calculate the operating profit margin, divide $750,000 by $2 million to get 0.375. To express the operating margin as a percentage, multiply the result by 100 to get a 37.5 percent margin.
Operating margin reveals the efficiency with which a business converts its revenue into operating profit. While non-cash expenses, currency fluctuations and other items are accounted for in net profit, the operating profit shows income earned from regular business activities. Therefore, higher operating margins are a good sign of financial health. Margins vary greatly by industry, so optimum margins are based on industry norms and company trends over time. Operating margins that remain stable or improve are favorable.
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