Short definition: Operating margin is a financial ratio that measures the profitability of a company’s core operations, expressed as a percentage of its revenue.
Explanation: It indicates how much profit a company generates from its core business activities, after deducting operating expenses such as cost of goods sold (COGS), selling, general, and administrative expenses (SG&A), and research and development (R&D) costs. Operating margin excludes non-operating income and expenses, such as interest and taxes.
Example: If a company has revenue of $1 million and operating expenses of $700,000, its operating income is $300,000, and its operating margin is 30% ($300,000 / $1,000,000 = 0.30).
Additional information (optional): Operating margin is a key indicator of a company’s operational efficiency and pricing power. A higher operating margin generally suggests a more profitable and well-managed company. Comparing operating margins across companies within the same industry can provide insights into their relative competitive positions.