Operating profit margin ratio tells us how company operations contribute to improving the profitability of the company. Healthy profit margin helps the company to earn more money for their shareholders.
Operating profit margin is simple words indicates how much a company earns after deducting expenses like wages, raw material etc.
Operating Profit Margin Ratio
Basically, this ratio shows the company efficiency, how the company manages to control the expenditure and increases its profit, although the revenue of the company is not in the hands of the management.
Operating Income is a synonym for earnings before interest and taxes (EBIT).
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Before calculating the Operating Profit Margin, you must aware of the Operating Income.
For instance – There is a grocery store its weekly sales is around $ 1000, this $ 1000 is simply in accounting language, its Net Sales / Revenue, the grocery store expenditure along with the cost of material is about $ 800.
$200 is the operating Income of the Grocery Store.
Operating profit margin calculator
Operating income = gross income – operating expenses – Depreciation – Amortization
For calculation of Operating Profit Margin Ratio just divide the operating income by Net Sales.
Here you have to work on two formula, first you have to figure out the operating income and second, you have figure out the Operating Profit Margin.
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The significance of Operating Profit Margin
Operating Profit Margin Ratio is the good indicator of the company’s health and also reveal the working and decision making of the management to reduces the expenditure.
This ratio also compares the company performance with the other companies in some sector.
As an investor, you must not jump to the decision by looking at High Operating Margin in the current quarter but the low operating margin in the past five quarters.
Company with High operating Profit Margin Ratio generally able to pay their debts and interest and also able to survive in difficult situations.
Limitations of operating Profit Margin
Operating profit margin comes with some of the limitations, that you as an investor will consider before calculation. operating Margin doesn’t reveal the return on Investment made by the company in the first place.
Some time company overheads also unable to provide the clear picture.
Operating Profit Margin Ratio only be used in the same sector or with the same business model.
The companies with different Business Model and Different Sector, such that have different Operating margins, thereby relatively useless.
What is a good operating margin?
Operating Margin is considered one of the accounting calculation tool for the company. The results of operating margins depend upon the selector.
Different sectors play with different margins, you cannot compare the operating margin of Cement companies to FMCG companies.
The Economical condition of the industry to differ from each other, so competition must be among competitors of the same sector.
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