Operating Margin - Definition

Operating Margin: Operating Margin or Operating Profit Margin or Net profit Margin is a financial metric used to evaluate the pricing strategy vis a vis the company’s ability to pay off its finance cost i.e. interest of debt and others. Higher the margin better the company.

Formula:  Operating Profit

                               Net Sales

   

Implication: Just like operating profit, operating margin in itself has no meaning unless compared with quarterly/budgeted figures of the company vis a vis comparison with its peers. It gives per rupee earning of the company to pay off its interest burden and taxes. There is a direct relation between the company’s performance and the profit margin. Higher the profit margin better off the company.

Example: A company has an operating margin of 10%, this means that it makes Rs,1.00 (before interest and taxes) for every rupee of sales. Often, nonrecurring cash flows are excluded from the operating margin calculation because they don't represent a company's true operating performance.