Definition of 'Operating Margin'
Operating Margin is a ratio that analysts use to measure a company’s operating efficiency and pricing strategy, expressed as a percentage by dividing operating income in a set period of time by net sales during that same period of time.
TheStreet Explains ‘Operating Margin’
For every dollar a company makes in revenue, it has to account for all of the wages it paid its workers and the materials it purchased. Once those costs are subtracted, you are left with the so-called operating margin—before interest on debt and taxes are subtracted. In that way, the operating margin is a good indicator of a company’s ability to reinvest in research and development, pay dividends, pay creditors, and generally operate in a profitable and healthy way. Investors and analysts will often look at operating margins for a single company over time—year to year, for instance—or compare similar quarters, such as Q2 of 2008 and Q2 of 2010. What they’re looking for when they do that is either a consistent operating margin or stable and reliable growth.
Operating margins, like enterprise value in acquisitions, offer a useful yardstick to compare two companies in the same industry. If one company has a margin of, say 5.8% and another has a margin of 4%, the company with the higher margin retains more of its revenue and is thought to be more efficient because of that fact. Operating margins come with a proviso, especially when considering relatively young companies that have very recent start-up, capital costs such as machinery or equipment—none of which are considered in the operating cost formula. In other words, while a tool and die maker may have a favorable operating margin of 25%, it may have borrowed a lot of money to set-up shop in Red Hook, Brooklyn.
Terms Related to 'Operating Margin':
Operating income measures a business’ efficiency and performance an...
Articles Related to 'Operating Margin':
By TSC Staff | 11/07/00 - 08:49 AM EST
By Diane Hess | 04/23/02 - 12:02 PM EDT