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Operating Margin

Understanding the Operating Margin: Measuring Operational Efficiency

The Operating Margin is a financial metric that measures the proportion of a company's revenue left after paying for variable costs of production, such as wages and raw materials. It indicates how much profit a company makes from its operations before deducting interest and taxes, reflecting its operational efficiency and pricing strategy.

Operating Margin = (Operating Income / Net Sales) × 100


Suppose Company LMN has the following financial details:


  • Operating Income: $300,000

  • Net Sales: $1,000,000


To calculate the Operating Margin:


  1. Divide operating income by net sales and multiply by 100: (300,000/1,000,000) × 100 = 30%

An Operating Margin of 30% indicates that Company LMN retains 30% of its revenue as operating profit after covering its variable costs. This suggests a strong operational efficiency.

Profitability Ratio

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