In around two minutes you will know what is Operating Margin. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.

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Operating Margin is the financial ratio that estimates the profitability of a business by taking into consideration operating income and revenue of a company.

Besides operating margin, there are also gross margin, pretax margin, and net profit margin. And if you are not sure what some of them mean, feel free to watch my other videos.

The formula of operating margin is extremely simple. You just need to take operating income and divide it by revenue of a company. The result is the percentage value. Both components of this formula can be found on the income statement.

Operating income is basically the amount of money left after paying all the production related costs. Such as, but not limited to, raw materials, labor, delivery, rent, utilities, marketing, and so on.

Let’s say, Company's A operating income is $300,000, and its revenue is $1 million. Its operating margin is $300,000 divided by $1 million, which equals 30%.

It means that for every dollar of revenue, Company A retains 30 cents as operating income.

Investors prefer see operating margins as high as possible. Which signals that a company’s management is effective at turning revenues into operating income.

Plus, operating margin allows to compare the profitability of companies of different sizes.

But be careful and only compare operating margins of companies within the same industry. And the reason for this is because different industries might have different acceptable levels of financial health.

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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.

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