What is the operating margin?

Operating margin is the ratio of the company's operating income to the total sale. This effectively shows how much of each dollar the company receives sales that it maintains as a profit. A comparison of the ratio over time or between companies can show the basic performance of business operations of the company. In fact, it is a profit or loss of business trading. The data does not include unconventional costs such as loan interest or tax payments.

Operating income in the UK is known as operating profit. The term is also often used interchangeably with EBIT or earnings before interest. Strictly speaking, there is a slight difference between operating income and EBIT: it will also take into account the non -correcting income. This is income from sources other than company trading, such as loan interest is produced by other companies or dividends and interests from investment. For example, a 20% operating margin will make a profit before tax 20 cents of each dollar (USD) that has income. This also makes it easier to compare between differentme with companies.

A company with a high operating margin does not necessarily have to be in great financial form because it can have heavy debt obligations. Similarly, a company with a low operating margin can be in good condition if it is debt -free or traded in a low tax region. In both cases, the ratio is simply a useful way to see how the company's business is likely to affect its basic financial power over time. It also provides the company's susceptibility to risk: a Low operating margin can have trouble if the demand for its products decreases or the production costs will unexpectedly increase.

There are several numbers that can be omitted from the calculations of the operating margin, even if they are technically part of the operating profits. One example is payments made in court cases. Although this may be significant parts of cash flow, they are discounted from trafficmargins, because it is not a fair representation of continuing costs and income of the main business.