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.
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