FinAnalysis, part 4: Operating Margin

It has been a while since aP talked about ratios of importance to Financial analysis. In previous topics we talked about Gross Margin, EBIT, and ROA and ROE. All of which are important ratios in analyzing profitability of a firm.

Operating Margin in simple equation is;

= Operating Income / Revenue

Definitions
"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." - wikipedia.com

"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, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt." - investopedia.com

Implication
This ratio gives an idea of how a company generate its income from operating activities on the basis of total revenue or net income. Example: an Operating Margin of 25% means, a company generates $0.25 for every dollar of sales revenue.

As with all the ratios this is another ratio that can be used to compare revenue between different companies in the same industry.