Definition
Operating margin (EBIT margin) shows profitability from core operations before interest and taxes. It captures both production costs and operating expenses (SGA, R&D), providing a clearer picture of management efficiency than gross margin alone. Improving operating leverage—where margins expand as revenue grows—is a sign of a scalable business model.
functions Formula
Operating Margin = Operating Income / Revenue × 100%
lightbulb Example
Revenue is $100M, COGS is $40M, and operating expenses are $35M. Operating income = $25M. Operating margin = 25%, showing strong core profitability.
verified_user Key Points
- Excludes interest and tax effects for cleaner comparison
- Shows management's operational efficiency
- Operating leverage amplifies margin changes
- More comparable across different capital structures than net margin