Flow of the article

• Operating Margin Formula
• Operating Profit Margin Calculator
• Operating Profit Margin Template

Operating Margin Formula

Operating Profit margin is a profitability ratio that is avidly used by the investors. This is such a popular ratio because the investors can get to know how much a firm earns in terms of Operating Profit.

Here’s the formula of operating margin –

Explanation of Operating Margin Formula

In the above formula, we have two important components.

The first component is operating profit.

We get to the operating profit by deducting the cost of goods sold and other operating expenses from the net sales. And if you look at the income statement of a company, you would be able to discover the operating earnings quite well. The speciality of operating income is that it doesn’t include incomes and expenses except the incomes and expenses related to the operating profit.

The second component in the above formula is net sales.

We start the income statement with the gross sales. Gross sales are the total revenue earned by the company. But to find out the net sales, we need to deduct any sales return or sales discount from the gross sales.

And in the ratio above, we compare the operating profit and the net sales to find out the proportion.

Use of Operating Margin Formula

There are many firms which emphasize on the net profit. The net profit is the result of the whole income and expenses rendered by a company. But if the net profit margin is higher, it doesn’t ensure efficiency of a company. Rather, it may hide the actual profit generated by the operating efforts of the company.

That’s why the investors should look at operating profit. Since operating profit helps in finding out actually how much profit the companies has made from its operations, it ensures efficiency and profitability. And that’s the reason – it is one of the most significant profitability ratios of all.

While finding out the profit margin, the investors should look at gross profit margin and net profit margin; but along with that they should look for operating margin which will surely bridge the gap in understanding how a company is actually doing operationally.

Example of Operating Margin Formula

Let’s take a simple example to illustrate Operating Margin Formula.

Here’re the few details of the income statement of YOU Matter Inc. –

• Gross Sales – $564,000
• Sales Return – $54,000
• Cost of Goods Sold – $2,40,000
• Labour Expenses – $43,000
• General & Administration Expenses – $57,000

Find out the operating profit margin of YOU Matter Inc.

In this example, first we need to find the net sales of YOU Matter Inc.

• Gross sales are $564,000 and the sales return is $54,000.
• Then the net sales would be = (Gross Sales – Sales Return) = ($564,000 – $54,000) = $510,000.

To find out the gross profit, we need to deduct the cost of goods sold from the net sales.

• Then the gross profit would be = (Net Sales – Cost of Goods Sold) = ($510,000 – $240,000) = $270,000.

Now we will deduct the operating expenses from gross profit to find out the operating profit.

• The operating profit would be = (Gross profit – Labour expenses – General and Administration expenses) = ($270,000 – $43,000 – $57,000) = $170,000

Using the operating margin formula, we get –

• Operating Profit Margin = Operating Profit / Net Sales * 100
• Or, Operating Profit Margin = $170,000 / $510,000 * 100 = 1/3 * 100 = 33.33%.

Operating Margin of Colgate

Below is the snapshot of Colgate’s Income Statement from 2007 to 2015.

You can use the following Operating Margin Calculator.

Operating Margin Formula in Excel (with excel template)

Let us now do the same example above in Excel. This is very simple.

First, you need to find the Net Sales and Gross Profit and then you will need to deduct the operating expenses from gross profit to find out the operating profit and then by using the operating Margin formula we will calculate Operating Profit Margin.

You can easily calculate the ratio in the template provided.

First, we need to find the net sales of YOU Matter Inc.

Now, to find the gross profit, we need to deduct the cost of goods sold from the net sales.

Now we will deduct the operating expenses from gross profit to find out the operating profit.

Now, By using the operating profit margin formula, we get –

You can download this operating margin template here – Operating Margin Excel Template

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This has been a guide to Operating Margin formula, its uses along with practical examples. Here we also provide you with Operating Margin Calculator with downloadable excel template.

• Profit Margin Examples
• Return on Total Assets (ROA)
• Ratio Financial Analysis
• Equity Turnover Ratio

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