Operating (EBIT) margin

Category:Financial analysis
Alternative names: operating profit margins operating income margins EBIT Margins Operating Margin Ratio operating income margins

What is operating margin

Operating margin is a profitability ratio that calculates the percentage of operating profit the company produces from its revenue. In other words, it shows how much of each dollar of revenues is left over after both costs of goods sold and operating expenses are deducted.

Operating margins is very similar to return on sales ratio, the only difference been that operating profit margins is always represented as percentage number while return on sales is represented as ratio. Operating margins is also similar to the EBITDA margins but unlike EBITDA margin, operating margin takes into account depreciation and amortization expenses.

How to calculate operating margin (formula)

Operating margin is calculated as ratio of the operating income divided by total revenue. The formula is:

Operating margin (%) = Operating Profit / Revenue.

Both the operating income and the revenue numbers can be found on the companys income statement.

What is a good operating profit margin number

Since operating profit margin is a way to measure company profitability, the higher the number the better. Higher profit margin are indication that the company is run efficiently and that the management is good at controlling its operating expenses.

Stocks with high operating margins

Name Operating margin Marketcap Industry
GSBD Goldman Sachs BDC Inc 79.9% $1.71B Credit Services
MFIC MidCap Financial Investment Corporation 79.6% $993.48M Asset Management
NRP Natural Resource Partners Lp 79.1% $1.12B Thermal Coal
PTMN Portman Ridge Finance Corp 78.7% $182.57M Asset Management
MSB Mesabi Trust 78% $226.71M Steel
OCSL Oaktree Specialty Lending Corp 77.7% $1.56B Credit Services
TPL Texas Pacific Land Corp 77% $13.49B Oil & Gas E&P

Why is operating profit margin important

Operating profit margin is used by investors to calculate the profitability of different companies. Since operating margins can differ across industries, when analysing the operating income margins of a company it should always be benchmarked again the industry averages. When looking at company’s operating profit margins investors also look for movements in the margins over time. A company with increasing operating income margins might be an indicator that the company efficiency and profitability is improving. This might be due efficient management that is able to lower its costs of operations. It can also be an indication of improvement in the company’s competitive advantage.

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