Understanding Operating Margin
Operating Margin measures the company's revenue before deducting any interest and taxes. It is calculated by dividing Operating Earnings by Total Revenue. And popularly also known as EBIT (Earnings Before Interest and Tax) margin or Return on sales. It is expressed in percentage number and is utilized in all screeners and charts throughout the site.
The operating margin shows the revenue made for each rupee of sales after the company pays variable costs but before interest and tax. A higher operating margin is considered good. It indicates that the company is efficient in its operations and generating profits from its sales.
The formula of Operating margin
Operating Earnings -
It is the income that a company earns from its core operations. Operating profit is found in the company's Income Statement
after deducting operating expenses from gross profit and before deduction of interest and taxes.
Total Revenue -
It indicates how much a company's revenue is before deducting any expenses. Total revenue is found in the company's Income Statement
Example of Operating Margin:
For the financial year, Larsen & Toubro Ltd. reported Operating Earning as Rs. 9352.79 cr. And Total Revenue as Rs. 14073.57 Cr.
The value as per the Formula [Operating Margin = (Operating Earnings / Total Revenue) x 100] is calculated as (9352.79 / 14073.57 x 100 = 66.45%).
Operating Margin or Return on Sales or EBIT Margin measures the company's revenue before deducting any interest and taxes. It is calculated by dividing Operating Earnings by Total Revenue. Operating Margin is also calculated on MRQ and TTM basis.
An operating margin of 15% or higher is considered good. A high operating margin indicates that the company is efficiently generating its profits from sales. A fall or rise in operating margin might be due to high or low operating costs.
For better analysis or understanding investors should compare the company's operating margin with its competitors or its historical data.
While looking at Operating Margin, the following points should also take into consideration:
An operating margin of 15% or higher is considered good for most industries. It indicates, the company is efficiently generating revenue from its sales.
A high margin might reflect, the company is doing well in managing its operating costs.
A low margin or fall in the operating margin may indicate, the company has high operating costs.
It only takes factors into account like the cost of goods sold and operating expenses and ignores the interest expenses, which are found further below in the income statement after operating profit.
Operating Margin differs from industry to industry. For most industries, an operating margin of 15% is considered good. While analyzing we should compare companies that operate in similar industries. Capital intensive companies operating margin can be less compared to sectors that need less amount of assets, or less operating costs like the IT sector, Financial sector, etc.,
How to use Operating Margin effectively
Investors should look for a higher operating margin. An operating margin of 15% or higher is favorable.
Before selecting any stock or looking at the company's turnover we should check its operational efficiency.
Don't look at operating profits only, as it only shows the company operating earnings, whereas operating margin indicates how much the company is making profits from its sales.
It will give a better understanding by comparing the particular company's stock with its peers. And also, look year over years operating margin and its growth for better analysis. Operating Margin is also calculated on MRQ and TTM basis, and it gives a better insight into the stock.
If the operating margin is low or falls year-over-year, it may indicate that the company has high operating costs.
For better understanding and, the analysis we should check other financial metrics with operating margins like Net Margin
, EBITDA Margin
, Cash EPS
, Return on Equity (ROE)
||Screener at TSR
|| Strong Bullish
||Extremely High Margin
|20 to 50
|15 to 20
|| Mild Bullish
|10 to 15
|5 to 10
|| Mild Bearish
|0 to 5
||Very Low Margin
|| Strong Bearish
||Extremely Low Margin
Related Operating Margin Screener