Profitability
Operating margin
Operating margin is the share of revenue left after the cost of goods sold and all operating expenses, before interest and taxes.
Operating margin = Operating income ÷ Revenue, where Operating income = Revenue − Cost of goods sold − Operating expenses
Worked example
| Revenue | $2,000,000 |
| Cost of goods sold | $1,200,000 |
| Operating expenses | $500,000 |
| Operating income | $300,000 |
$300,000 ÷ $2,000,000 = 15%
Why it matters
Operating margin shows how well the core business turns sales into profit, regardless of how it is financed. It is where overhead creep shows up first.
Common mistakes
Where it misleads
Including interest or one-off gains, which belong below operating income.
Comparing it with EBITDA margin, which adds back depreciation and amortization.
Missing costs that are booked inconsistently, such as owner pay recorded as distributions one year and salary the next.
Related terms
Keep reading
- Net profit marginNet profit margin is the share of revenue left as profit after every expense, including interest and taxes.
- Gross marginGross margin is the share of revenue left after paying the direct costs of delivering what you sold.
- EBITDAEBITDA is earnings before interest, taxes, depreciation and amortization: a measure of operating profit before financing, tax and non-cash charges.
Stop calculating it by hand.
Dear CFO keeps your statements, forecasts and metrics current from the systems you already run.