Operating Margin

Operating margin, also called operating profit margin, measures the proportion of revenue that a company retains after paying for variable costs such as wages, raw materials, and overhead, but before deducting interest and taxes. It is calculated by dividing operating income by total revenue and expressing the result as a percentage.

A higher operating margin indicates a company is more efficient at converting revenue into profit from its core operations. Software companies often have operating margins above 30% due to low variable costs, while grocery retailers may operate on margins below 5% due to thin markups on high-volume products.

Investors track operating margins over time to assess whether a company is becoming more or less efficient. Declining margins may signal rising costs, pricing pressure, or competitive challenges. Comparing operating margins among companies in the same industry reveals which firms have the strongest competitive advantages and most efficient operations.