What is Operating Margin?
Operating margin (also called operating profit margin or EBIT margin) measures the share of revenue left after covering all operating costs, but before interest and income taxes. It isolates the performance of the underlying business model, showing how well leadership manages gross margin, operating expenses, and operating leverage to create value for shareholders.
A rising operating margin usually signals better cost control, improved pricing power, or a higher-quality revenue mix. A falling margin can flag bloated SG&A, weak gross margin, or an unsustainable go-to-market model even if top-line growth still looks strong.
Formula
The core relationship is:
Where operating income (EBIT) is derived from the income statement as:
You can also express EBIT starting from gross profit:
Example
Assume a company reports:
- Revenue (Net Sales): $1,000,000
- Cost of Goods Sold (COGS): $600,000
- Operating Expenses (excl. D&A): $200,000
- Depreciation: $30,000
- Amortization: $20,000
First compute operating income (EBIT):
EBIT = $1,000,000 − $600,000 − $200,000 − $30,000 − $20,000 = $150,000
Then compute operating margin:
Operating Margin (%) = $150,000 ÷ $1,000,000 × 100 = 15%
A 15% operating margin would generally be viewed as healthy in many mature industries, especially if it is stable, above the company’s own history, and ahead of its peer benchmark.
This metric can then be connected to other profitability and value-creation measures such as gross margin, EBITDA margin, net profit margin, ROIC, and free cash flow.