Operating Margin

Operating margin measures how efficiently a company runs its core operations. It reflects both pricing and cost control, including the cost of goods and all operating expenses such as wages, rent and marketing.

For example, a company with revenue of 2 million and operating income of 300,000 has an operating margin of 15%. For every 100 of sales, 15 is left after operating costs.

Because operating margin is calculated before interest and taxes, it allows fair comparisons between companies with different levels of debt or different tax situations.

Margins vary widely by industry. Software companies may have operating margins above 30%, while supermarkets often operate on margins of a few percent, relying on high sales volumes.

Changes in operating margin over time are revealing. A rising margin may mean the company is gaining pricing power or spreading fixed costs over higher sales. A falling margin may signal rising costs, price competition or heavy investment. Analysts often compare operating margins with competitors to judge which companies run their operations most efficiently.