Operating Margin
Operating income (EBIT) divided by revenue. Captures profitability from core operations after all operating costs but before interest and taxes.
When to use: Use to measure core-business profitability stripped of capital-structure and tax effects. The cleanest comparison metric across firms with different debt levels and tax situations. Year-over-year trend is the highest-information signal.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| OperatingMargin | Operating Margin | Operating income (EBIT) divided by revenue | % |
| EBIT | EBIT | Earnings before interest and taxes (operating income) | $ |
| Sales | Annual Sales | Annual revenue (net sales) | $ |
Real-Life Examples
Example 1: Industrial Mid-Cap
EBIT $400M, revenue $2,000M.
Given
Step-by-Step
20% operating margin — strong for an industrial. Compare to peers; persistent above-peer margins signal cost discipline, scale, or operational excellence.
Frequently Asked Questions
Gross margin = revenue − COGS, divided by revenue. Operating margin subtracts ALL operating expenses (SG&A, R&D, D&A) on top of COGS. Gross-to-operating compression shows where overhead is consuming profit.
EBITDA margin adds back depreciation and amortization to EBIT. Useful for capital-intensive industries where D&A swings dominate, but masks the actual cost of replacing capital. Both views complement each other.