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Operating Margin

 

Operating margin is a profitability percentage that shows what company’s profit margin is before it pays interests and taxes. Operating margin simply ignores capital structure (because ignores financial activity) and taxes that has to be paid, and it is better way to measure the real effectiveness than net income margin. However, in most cases EBITDA margin is even more effective, but operating margin has more advantages for construction companies or other companies that are consistently renting their tangible assets.

 

EBIT margin in most cases is equal to operating margin because EBIT and operating income are very similar indicators and the difference between EBIT margin and operating margin will occur if company has non-financial and at the same non-operating income. 

 

Operating margin calculation


Operating margin = (Operating income / Revenue) * 100% = ((Gross profit – Operating expenses) / Revenue) * 100%


* All data that are used in calculations should be for the same period which normally can be from 3 to 12 months.


** Income from non-continuing activity could be eliminated depending on the purpose of comparison. 

 

Operating margin interpretation

 

Operating margin gives a lot of information about company’s effectiveness and competitiveness in the market. If company’s operating margin is higher than competitors’ that may mean such company has stronger positions. Few reasons may be behind that: company has better know-how, company’s management is more effective, company has stronger brand, company has access to cheaper resources, has a better location or other advantages. It is natural that companies in different industries and regions have different operating margins, so it is important to compare only competing businesses. Before comparison income structure should be carefully analyzed and the differences should be excluded.

 

Also operating margin can be a convenient ratio to track company’s results. Operating margin of fresh financial results should be compared to operating margin of the same period but for previous year. However, operating margin should be used together with EBITDA margin which ignores changes in depreciation.

 

 

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