Operating Margin

Operating Margin

The percentage of revenue that remains as profit after covering all operating expenses but before accounting for interest and taxes, calculated by dividing operating income by revenue and multiplying by 100.

For instance, a manufacturing company with quarterly revenue of $15 million, cost of goods sold of $9 million, and operating expenses of $3 million would have operating income of $3 million and an operating margin of 20% ($3 million ÷ $15 million × 100).

Operating margin focuses solely on profit from core business operations, excluding the impact of financing decisions (interest) and tax obligations. This makes it valuable for comparing operational efficiency across companies with different capital structures or tax situations. The metric reveals how effectively a company controls production costs and operating expenses relative to revenue generation. Rising operating margins typically indicate improving operational efficiency, pricing power, or economies of scale, while declining margins may signal increased competition, rising costs, or operational challenges.