Operating Margin Calculator

Operating margin is a metric that shows how much profit a business can make on a dollar of sales. The metric is measured after paying variable production costs and before paying taxes or interests.

Generally, it shows how much of the generated sales is left after paying all operating expenses. Therefore, it’s essential to any business at any stage of growth.

However, calculating the operating margin can be a hassle for many people. Don’t fret! With the help of our operating margin calculator, it’ll be an easy task, and you’ll get accurate results.

What Is the Operating Margin?

Operating margin, or operating profit margin, represents the residual profits after subtracting the cost of goods sold (COGS) from the generated revenue.

Generally, COGS is the direct cost of goods the company pays for. It includes the cost of materials, labor, distribution costs, and sale force costs.

How to Calculate the Operating Margin?

The easiest way to calculate the operating margin is by using the formula:

operating margin = (operating income / net sales) x 100

So, to calculate the operating margin, you need to figure out the operating income and net sales values. Let me tell you how to do so.

Calculating the Operating Income

To calculate the operating income, you can follow this formula:

Operating Income = Revenue – Cost Of Goods Sols (COGS) – Operating Expenses.

Calculating Net Sales

Calculating net sales is fairly simple. Here’s the formula you need:

Net Sales = Gross Sales – (Return Values + Discount Losses + Sales Taxes + Allowances).

Calculating the Operating Margin

After calculating the operating income and net sales, you can figure out the operating margin percentage using this formula:

Operating margin = (operating income / net sales) x 100.

If you’re having trouble with the operating margin calculations, remember to use Calcopolis. Our website has a wide range of helpful tools and calculators.

Operating Margin Calculation Example

Let’s assume that a company has a net sale of $100,000 and an operating income of $40,000. In that case,

Operating Margin = (Operating Income / Net sales) x 100 = ($40,000 / $100,000) x 100 = 40%.

So, the company has an operating margin of 40%.

Why Is the Operating Margin Important?

Operating margin can be helpful to your business in many scenarios. For starters, it shows the percentage of revenue that the business generates, which can be used to pay the company’s investors and taxes.

In addition, the operating margin is essential to analyze a stock’s value. On top of that, a high operating margin is a positive indicator of the company’s financial health.

What Are The Limitations of the Operating Margin?

While there are many advantages to the operating margin, there are some limitations too. For instance, the operating margin ratio can differ between companies in different industries.

In other words, you can use operating margins to compare companies that are in the same industry only.

In addition, a high value of the operating margin doesn’t necessarily indicate high cash flow. Further, the operating margin calculation doesn’t account for interest expenses and tax expenses.

What Is a Good Operating Margin?

Generally, a good operating margin is around 15% or higher. Any value below % ten is considered low.

However, there are many factors that influence the operating margin, including the field of industry. Overall, a good operating margin should cover all the company’s costs and leave room for profit.

How to Improve Operating Margin?

There are many ways a company can improve its operating margin. For starters, boosting sales can give good results. You can do so by increasing the prices or the volume of sales.

In addition, you can cut down on some unnecessary expenses and reevaluate the company’s spending. However, cutting too many costs can do more harm than good.

To elaborate, you shouldn’t shift to inferior material or lose skilled workers. Instead, you should find a way to reduce the costs without sacrificing quality.

Can Operating Margin Be Negative?

Yes, the operating margin can be negative in some cases. For instance, if a business spends too much money making a certain product, it can lead to a negative operating margin.

Generally, this can happen when the operating profit of the company is negative. In that case, the company’s operations are inefficient and require reevaluation.

Authors

Created by Lucas Krysiak on 2023-04-11 18:03:41 | Last review by Mike Kozminsky on 2023-04-11 18:22:54