operating margin

A profitability ratio that compares a company’s operating income to sales. Operating income is earnings before interest and taxes (EBIT). Operating margin indicates how successful management has been in generating income from operating the business. The calculation is sales less cost of goods sold and selling, general & administrative (SG&A) costs divided by sales. Trends in operating margin—positive or negative—are, for the most part, directly tied to management decisions. Companies with higher operating margins relative to their peers might possibly have more effective price controls, or they might be growing sales more than operating costs. Among analysts, operating margin is often considered a more valid or reliable profitability measure than net profit margin, as operating income tends to be more difficult to manipulate than net earnings.