Operating Margin

Operating Margin is also known as operating profit margin, earnings before interest and taxes (EBIT) margin, operating income margin, or return on sales (ROS). Operating margin is calculated by deducting the cost of goods sold (COGS), operational, depreciation, and amortization costs from net sales.

Accounting software is used to calculate and analyze operating margins to help businesses visualize real-time income on each dollar of sales revenue.

Operating margins are used by investors to identify growing or shrinking margin and spending patterns. It is used by analysts to evaluate the stock value, and the ability of a company to pay equity and debt investments. Senior leadership team (SLT) uses operating margin as a benchmark to measure competition and managers to gain insights into variable costs and effectiveness of their decisions.

Operating profit margin is considered in conjunction with free cash flow, net profit, and gross profit by business managers. The formula to calculate Operating profit margin is (Operating earnings - Net sales revenue) X 100%, where operating earnings refer to the profit that is made by businesses after different expenses, such as COGS, depreciation, general and administration (G&A) expenses, marketing, research and development, and other operating costs. Businesses can identify net income before interest and taxes during a specific period with the help of operating earnings. Net sales revenue is sales returns, discounts, and allowances deducted from total revenue.