Operating margin

Operating margin

In business, operating margin, operating income margin, operating profit margin or return on sales (ROS) is the ratio of operating income (operating profit in the UK) divided by net sales, usually presented in percent.

 \mathrm{Operating\ margin} = \left ( \frac {\mathrm{Operating\ income}}{\mathrm{Revenue}} \right )

Net profit measures the profitability of ventures after accounting for all costs.[1]

Return on sales (ROS) is net profit as a percentage of sales revenue. ROS is an indicator of profitability and is often used to compare the profitability of companies and industries of differing sizes. Significantly, ROS does not account for the capital (investment) used to generate the profit. In a survey of nearly 200 senior marketing managers, 69 percent responded that they found the "return on sales" metric very useful.[1]

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is a rough measure of operating cash flow, which reduces the effect of accounting, financing, and tax policies on reported profits.[1]



These financial metrics measure levels and rates of profitability. How does a company decide whether it is successful or not? Probably the most common way is to look at the net profits of the business. Given that companies are collections of projects and markets, individual areas can be judged on how successful they are at adding to the corporate net profit. Not all projects are of equal size, however, and one way to adjust for size is to divide the profit by sales revenue. The resulting ratio is return on sales (ROS), the percentage of sales revenue that gets “returned” to the company as net profits after all the related costs of the activity are deducted.[1]


Net profit measures the fundamental profitability of the business. It is the revenues of the activity less the costs of the activity. The main complication is in more complex businesses when overhead needs to be allocated across divisions of the company. Almost by definition, overheads are costs that cannot be directly tied to any specific product or division. The classic example would be the cost of headquarters staff.[1]

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.[1]

Net profit ($) = Sales revenue ($) - Total costs ($)[1]

Return on sales (ROS): Net profit as a percentage of sales revenue.[1]

Return on sales (%) = Net profit ($) / Sales revenue ($)[1]

Earnings Before Interest, Taxes, Depreciation, and Amortization (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.[1] EBITDA ($) = Net profit ($) + Interest Payments ($) + Taxes Incurred ($) + Depreciation and Amortization Charges ($)[1]

Example: The Coca Cola Company[2]

Consolidated Statements of Income
(In millions)
Net Operating Revenues $ 20,088
Gross Profit $ 15,924
Operating Income $ 6,318
Income Before Income Taxes $ 6,578
Net Income $ 5,080

(Relevant figures in italics)

 \mathrm{Operating\ margin} = \left ( \frac {6,318}{20,088} \right ) = \underline{\underline{31.45 %}}

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.

See also


  1. ^ a b c d e f g h i j k Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN 0137058292. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language: Marketing Activities and Metrics Project.
  2. ^ The Coca Cola Company Form 10-K SEC Filing 2006, p 67

Wikimedia Foundation. 2010.

Игры ⚽ Нужна курсовая?

Look at other dictionaries:

  • operating margin — ➔ margin * * *    The ratio of operating profit to turnover over a given period, expressed as a percentage and used to indicate a company s ability to control its variable costs. * * * operating margin UK US noun [C] ACCOUNTING ► NET MARGIN(Cf.… …   Financial and business terms

  • Operating Margin — A ratio used to measure a company s pricing strategy and operating efficiency. Calculated as: Operating margin is a measurement of what proportion of a company s revenue is left over after paying for variable costs of production such as wages,… …   Investment dictionary

  • operating margin — Net operating income divided by sales for the period …   Black's law dictionary

  • gross operating margin — UK US noun [C] (ABBREVIATION GOM) ACCOUNTING ► a company’s profit from selling goods or services in a particular period after costs directly related to producing them are subtracted. Gross operating margin is often shown as a percentage of money… …   Financial and business terms

  • Incremental operating margin — is the increase or decrease of income from continuing operations before stock based compensation, interest expense and income tax expense between two periods, divided by the increase or decrease in revenue between the same two periods …   Wikipedia

  • Net operating margin — The ratio of net operating income to net sales. The New York Times Financial Glossary …   Financial and business terms

  • net operating margin — The ratio of net operating income to net sales. Bloomberg Financial Dictionary …   Financial and business terms

  • Operating leverage — Sachin Jadhav explained the Definition of Operating Levarage as, The operating leverage is a measure of how revenue growth translates into growth in operating income. It is a measure of leverage, and of how risky (volatile) a company s operating… …   Wikipedia

  • margin — the difference between the selling price and the purchase price of an item usually expressed as a percentage of the selling price. Compare mark up. Glossary of Business Terms Financial safeguards to ensure that clearing members (usually companies …   Financial and business terms

  • Margin — This allows investors to buy securities by borrowing money from a broker. The margin is the difference between the market value of a stock and the loan a broker makes. Related: security deposit ( initial). The New York Times Financial Glossary *… …   Financial and business terms

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”