Operating Margin is a profitability ratio that indicates how much of a company's revenue is left over as operating income after covering its operating costs, excluding interest and taxes. It is expressed as a percentage and is calculated by dividing operating income (earnings before interest and taxes, or EBIT) by total revenue. The Operating Margin is a key measure of a company's efficiency in controlling its production and administrative costs while generating revenue.
For instance, if a company has total revenue of $1,000,000 and operating expenses of $800,000, its operating income is $200,000. Therefore, the Operating Margin would be $200,000 / $1,000,000 = 20%. This means for every dollar of revenue, the company retains 20 cents before considering interest and taxes.
Operating Margin allows investors and managers to compare a company's profitability across periods or against other companies in the industry. A higher Operating Margin indicates better financial health and cost control, while a low margin might suggest inefficiencies or pricing challenges.