Definition

Operating margin is a ratio derived by comparing a company's operating income to its net sales revenue. The operating margin or operating profit margin tells how much operating income a company has generated per dollar of sales revenue.

Example

Operating margin can be calculated as (Operating Income / Net Sales Revenue) x 100Suppose Vareto's net sales revenue is $100 million. Its COGS and operating expenses are $60 million. Thus, the operating income will be $40 million and the operating margin will be (40/100 x 100) = 40%.

Why it matters

The operating margin is a reflection of the company's ability to derive profits from its core business after incurring fixed and variable costs. It is an indicator of how well a company is managed, which can translate to higher revenues and controlling costs. If the company improves its operating margin over time, it is an indication of improved overall financial health and competitiveness.

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