What Is Operating Margin?
Operating margin measures how much operating profit a company keeps from each dollar of revenue. It sits below gross margin in the profitability stack because it includes more costs.
How operating margin is calculated
The basic formula is:
- Operating margin = operating income ÷ revenue
Operating income is profit from the core business after operating expenses such as sales, marketing, research, administration, and other operating costs. It is usually before interest and taxes.
Why it matters
Operating margin helps investors see whether the core business is becoming more or less profitable. If revenue grows faster than operating expenses, operating margin may improve. If costs rise faster than revenue, operating margin may fall.
This can reveal operating leverage. A company with high fixed costs may become much more profitable as revenue scales, but it may also suffer when revenue falls.
Read the explanation
A falling operating margin is not always bad. A company may be investing in growth, entering a new market, or absorbing temporary costs. But if management cannot explain the pressure, or if the pressure keeps worsening, investors should pay attention.
Compare operating margin with peers and with the company's own history. The trend is often more useful than one quarter.