What Is Operating Profit Margin?
Operating Profit Margin shows the proportion of revenues left after making payment for the operations unrelated to the direct production of goods and services. It is also referred to as income from operations and shows the margin left after paying the overhead expenses, manufacturing expenses, selling and distribution expenses, administrative expenses, etc.
Operating profit margin is one of three metrics for measuring a company's profitability ratios, the other two are gross profit margin and net profit margin. See our comprehensive articles on gross profit margin and net profit margin and how to calculate them.
The operating profit margin ratio is a key indicator for lenders and investors because it helps them to check the effectiveness of a company’s operations.
You can also check out our article on the difference between net income and gross income
Operating Profit Margin Formula
The formula to calculate this ratio is given as:
Operating Profit Margin = Operating Profit/Net Sales × 100
Where, Operating Profit = Revenue – (Operating Expenses, Depreciation, Amortization, etc.)
How Do You Calculate Operating Profit Margin?
Suppose a company's net sales is $400,000 and its cost of goods sold (COGS) is $2,00,000. Other expenses such as Wages, Rent and Operating expenses are $50,000, $10,000 and $20,000 respectively. Then the operating profit margin will be:
= [400,000 – (200,000 + 50,000 + 10,000+ 20,000)] / 400,000
= 0.3 or 30% in percentage
Also Read: What is Gross Profit? Gross Profit Formula
What is a Good Operating Profit Margin?
The answer to this question depends on your industry and the current phase of your business. But when calculating your company's operating margin, use these numbers as a rule of thumb.
5%: low operating profit margin
10%: average operating profit margin
20%: high operating profit margin
How to Use Operating Profit Margin
Same way you keep tabs on your company's accounting documents like income statement and balance sheet, keeping an eye on your net profit, cash flow, and operating profit margin is also a good idea.
Whether you calculate it through accounting software, an operating margin calculator or manually through the formula above, it is important to update this number at least annually to better understand the health of your business.
Then if your company plan to seek funding from investors or a loan, you will show this number if they ask for it.