Description
On the income statement, sales booked in a given period (known as revenue) minus the direct costs of producing the products of a firm (Cost Of Goods Sold or “COGS”) equals Gross Profit. When indirect costs to the business (Sales, General, & Administrative expense or “SG&A”) and accounting items are subtracted (depreciation and amortization) you arrive at Operating Profit (note that Operating Profit is the same as Earnings Before Interest & Taxes, or EBIT). The “Operating Margin” is the operating profit expressed as a percentage of revenue.
Calculation
What it Means
The operating margin measures how much revenue a firm retains after direct and indirect costs are accounted for. For example, a company with an operating margin of 30% keeps $0.30 out of every dollar of revenue after accounting for operating expenses as well as depreciation and amortization.