Operating Margin

Operating margin is the percentage of revenue left over after paying all operating expenses (salaries, rent, materials, etc.) but before interest and taxes. It measures how efficiently the core business runs, separate from how the company is financed or taxed.

Operating margin strips away financing decisions and tax situations, so it gives you a cleaner view of the business itself. Two companies with identical operating margins but different debt loads will have different net profit margins — operating margin lets you compare them without that noise.

A falling operating margin while revenue is growing means costs are growing faster than sales, which is usually a bad sign. A rising operating margin with flat revenue means the company is becoming more efficient.

Comparing operating margin to profit margin tells you how much of the company’s earnings are affected by interest payments and taxes versus the core business. A large gap between the two suggests the company carries significant debt.