Operating margin is a profitability ratio that measures the operating income of a company as a percentage of its revenue. It is an important indicator of a company’s operational efficiency and profitability.
The formula for calculating operating margin is:
Operating Margin = Operating Income / Revenue
Here, operating income is calculated by subtracting the operating expenses from the revenue. Operating expenses include all the expenses that a company incurs to maintain its daily operations, such as salaries, rent, utilities, and depreciation.
To calculate operating margin, follow these steps:
Find the operating income by subtracting the operating expenses from the revenue. Operating Income = Revenue – Operating Expenses
Divide the operating income by the revenue to get the operating margin. Operating Margin = Operating Income / Revenue
For example, let’s say that a company has a revenue of $1,000,000 and operating expenses of $800,000. The operating income would be:
Operating Income = $1,000,000 – $800,000 = $200,000
The operating margin would be:
Operating Margin = $200,000 / $1,000,000 = 0.20 or 20%
So, the operating margin for this company is 20%.