Operating margin definition

Operating margin is a profitability ratio that measures the percentage of revenue a company keeps as operating profit. It shows how profitable the core business is before interest, tax, and one-off items are taken out.

Operating margin equals operating income divided by revenue, multiplied by 100. A higher operating margin points to better cost control or stronger pricing power, while a falling margin can flag rising costs or weaker sales.

Operating margin sits between two related ratios. Gross profit margin counts only the cost of goods sold against revenue, so it reads highest. Net profit margin subtracts everything, including interest and tax, so it reads lowest. Operating margin lands in the middle: it strips operating expenses but stops before interest and tax.