Operating Margin calculator
Operating margin or operating profit margin measures what proportion of a company's revenue is left over, after deducting direct costs and overhead and before taxes and other indirect costs such as interest. Operating margin formula is:
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Interpretation of Operating Margin
Operating margin is used to measure company's pricing strategy and operating efficiency. It gives an idea of how much a company makes (before interest and taxes) on each dollar of sales.
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Definitions and terms used in the Operating Margin calculator
- Net Sales: the amount of revenue generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed.
Net sales = Gross sales - Sales returns and allowances
- Cost of Goods Sold (COGS): the direct cost attributable to the production or purchasing of the goods sold by a company. It is also referred as Cost of sales.
- Gross Profit: the difference between Net Sales and its Cost of Goods Sold, before deducting overhead, payroll, taxes, interest and other operating expenses.
Gross profit = Net sales - Cost of Goods Sold
- Operating Expenses (also known as "OPEX"): the expenses incurred by a business in its normal day-to-day operations, but not directly associated with production of goods. Operating expenses include payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs etc. These expenses are divided into selling expenses and administrative and general expenses.
- Operating Income (also known as Earnings before Interest and Taxes - EBIT): is a measure of a company's profitability that excludes interest and income tax expenses. This is the surplus generated by operations and equals gross profit less all operating expenses.
Operating Income = Gross profit - Operating Expenses
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