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Operating Margin interpretation

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:

Operating margin formula

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. Operating margin ratio shows whether the fixed costs are too high for the production or sales volume.

A high or increasing operating margin is preferred because if the operating margin is increasing, the company is earning more per dollar of sales.

Operating margin can be used to compare a company with its competitors and with its past performance. It is best to analyze the changes of operating margin over time and to compare company's figure to those of its competitors.

Operating margin shows the profitability of sales resulting from regular business. Operating income results from ordinary business operations and excludes other revenue or losses, extraordinary items, interest on long term liabilities and income taxes.

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