Operating margin

 ( Financial Ratios ) 

Net profit: To calculate net profit for a unit (such as a company or division), subtract all costs, including a fair share of total corporate overheads, from the gross revenues. $$\backslash text\{Net\; profit\}\backslash \; (\backslash \$)\; =\; \backslash text\{Sales\; revenue\}\backslash \; (\backslash \$)\; -\; \backslash text\{Total\; costs\}\backslash \; (\backslash \$)$$

Return on sales (ROS): Net profit as a percentage of sales revenue. $$\backslash text\{Return\; on\; sales\}\backslash \; (\backslash \%)\; =\; \backslash frac\{\backslash text\{Net\; profit\}\backslash \; (\backslash \$)\}\{\backslash text\{Sales\; revenue\}\backslash \; (\backslash \$)\}$$

EBITDA is a very popular measure of financial performance. It is used to assess the 'operating' profit of the business. It is a rough way of calculating how much cash the business is generating and is even sometimes called the 'operating cash flow'. It can be useful because it removes factors that change the view of performance depending upon the accounting and financing policies of the business. Supporters argue it reduces management's ability to change the profits they report by their choice of accounting rules and the way they generate financial backing for the company. This metric excludes from consideration expenses related to decisions such as how to finance the business (debt or equity) and over what period they depreciate fixed assets. EBITDA is typically closer to actual cash flow than is NOPAT. ... EBITDA can be calculated by adding back the costs of interest, depreciation, and amortization charges and any taxes incurred. $$\backslash text\{EBITDA\}\backslash \; (\backslash \$)\; =\; \backslash text\{Net\; profit\}\backslash \; (\backslash \$)\; +\; \backslash text\{Interest\; Payments\}\backslash \; (\backslash \$)\; +\; \backslash text\{Taxes\; Incurred\}\backslash \; (\backslash \$)\; +\; \backslash text\{Depreciation\; and\; Amortization\; Charges\}\backslash \; (\backslash \$)$$ Example: The Coca-Cola CompanyThe Coca Cola Company Form 10-K SEC Filing 2006, p 67

$$\backslash text\{Operating\; margin\}\; =\; \backslash tfrac\; \{6,318\}\{20,088\}\; =\; \backslash underline\{\backslash underline\{31.45\; \backslash \%\}\}$$

It is a measurement of what proportion of a company's revenue is left over, before taxes and other indirect costs (such as rent, bonus, interest, etc.), after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, such as interest on debt. A higher operating margin means that the company has less financial risk.

Operating margin can be considered total revenue from product sales less all costs before adjustment for taxes, dividends to shareholders, and interest on debt.

Under this formulation, ROS can be written as:

$\backslash text\{ROS\}\; =\; \backslash text\{CMR\}\; \backslash times\; \backslash text\{MOS\}$

where the contribution margin ratio measures the proportion of each sales dollar remaining after variable costs, and the margin of safety measures how far actual or expected sales exceed the break-even point. Using standard cost–volume–profit notation, this relationship can be expressed as:

$\backslash text\{ROS\}\; =\; \backslash frac\{p\; -\; v\}\{p\}\; \backslash times\; \backslash frac\{x\; -\; x\_\{bep\}\}\{x\}$

where p denotes unit price, v unit variable cost, x sales volume, and x_bep the break-even sales level.

This decomposition highlights that a given ROS may arise from different combinations of margin strength and sales resilience. A high contribution margin ratio combined with a low margin of safety reflects strong per-unit profitability but limited protection against sales declines, whereas a lower contribution margin ratio combined with a higher margin of safety reflects thinner margins but greater operating stability.

Delfino (2025) also introduces the notion of a profitability transition point, defined as the sales level at which the contribution margin ratio and the margin of safety are equal. At this point, profitability reflects a balance between margin efficiency and sales volume relative to break-even. Firms operating above or below this transition point may therefore exhibit similar ROS values driven by different underlying price, cost, and volume structures.

• Efficiency ratio
• Incremental operating margin
• Profit margin

• Linda Yaccarino
• Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.