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.

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

Example

The Coca Cola Company

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

• Efficiency ratio
• Profit margin