Operating Margin Ratio | Analysis | Formula | Example

Operating Margin Ratio Definition

Operating margin ratio also is known as the operating profit margin. It is the Operating Margin Ratioprofitability ratio which is used to measure the percentage of total revenue made by the operating income.

In order words, it calculates the overall left revenue after paying off all the variable or operating cost.

Conversely, it shows that how much revenue available to cover all the non-operating expenses like interest.

For the investors and creditors, this ratio is important because this ratio shows the efficiency of the profitability of the operations of the business. If a company make 30% revenue from its operation it means that the company runs its operation in a better way.

So the company have a good income for operating business efficiently.  But if the company’s income decline then the company need to find a new income way.

Formula

Operating margin formula can be calculated by dividing the operating income by net sales.

Operating margin = Operating income/Net sales

Operating income is the income from operations. It is separately stated on the income statement from non-operating expenses like interest.

By subtracting the operating expenses, depreciation, and amortization from gross income or revenue, operating income can be calculated.

Analysis

Operating profit margin shows the ability of business supporting its operations. Form the operations if the company make enough money then that company is a stable company.

But if for covering the operation expenses, both operating and non operating income require then the companies are not stable.

High operating profit margin is good as compared to the low operating profit margin. Because companies with a high margin have enough money from their operations to pay off its variable and fixed cost.

For every dollar, if the profit margin ratio is 30% it means that from every dollar, 30 cents remaining after the payment o all the operating expenses.

It also means that 30 cents left for the covering of non-operating expenses.

Example

Bell has the jewellery store. He sells jewellery all over the country. On the financial statement, Bell has the following numbers.

  • COGS = 500,000 dollars
  • Net income = 100,000 dollars
  • Wages = 100,000 dollars
  • Rent = 15,000 dollars
  • Other operating expenses = 25,000 dollars.

Calculation of operating margin ratio for Bell is

0.36 = 360,000/1,000,000

From the above result, it is clear that for every dollar sales bell use 64 cents to pay the variable cost. To cover non operating expenses only 36 cents remaining for Bell.

For more Financial Ratio Check: 

Operating Cash Flow

Operating income

Operating leverage

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