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
SACH Sachem Capital Corp 80% $153.8M REIT - Mortgage
BXSL Blackstone Secured Lending Fund. 79.9% $3.86B Asset Management
NRP Natural Resource Partners Lp 79.7% $661.75M Thermal Coal
FSK FS KKR Capital Corp 79% $5.55B Asset Management
CSWC Capital Southwest Corp 78.9% $558.52M Asset Management
TWO Two Harbors Investment Corp 78.2% $1.53B REIT - Mortgage
VNOM Viper Energy Partners LP 78.2% $5.23B Oil & Gas Midstream

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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