Operating Margin

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Definition

Operating margin measures the proportion of revenue left over after paying the variable costs of production. It is an important indicator of efficiency and profitability.

Operating margins can be used to demonstrate management effectiveness in maintaining costs or increasing revenues. High operating margins, or increasing margins over time, demonstrate management's effectiveness in increasing operating profits, whereas declining operating margins can point out significant weaknesses in company growth. Low operating margins in certain industries may also indicate cost controls (if implemented) could lead to better operating income.

An operating margin of .15 indicates that for each dollar of revenue that comes in, 15 cents will drive to the operating income. Operating margin can be used to make predictions of future operating profits based on revenue growth.

Formula

Operating Income takes into account:
- Revenue
- COGS
- D&A
- Operating Interest Expense
- Operating Expenses (R&D, SG&A, Rent Expense, Pension and Retirement Expense)

It does not include:
- Non-Operating Interest Expense
- Asset Writedowns or Impairments
- Restructuring Charges
- M&A related gains/losses
- Gains/losses from the sale of assets (unless those are core business functions)
- Tax Expenses

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