Operating margin
EBIT Margin
Operating margin is the profit from running the business, before interest and tax, as a percentage of sales. It shows how efficiently the company converts revenue into profit from operations alone.
Formula
Operating margin
Operating Margin (%) = Operating Profit (EBIT) ÷ Sales × 100
Benchmark: Compare within the sector and across five years; watch the gap to gross margin
Reading the number
Between gross margin and operating margin sit the running costs: salaries, rent, advertising, distribution, and depreciation. The gap between the two tells you how expensive the business is to operate. A wide gap with a healthy gross margin means heavy overheads, which is normal for a consumer brand that advertises constantly and unusual for a commodity producer.
Operating profit is also the numerator in ROCE and in interest coverage, so a falling operating margin quietly weakens both of those ratios at once.
Indian example
Related ratios
Glossary terms
Go deeper
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