Accounting and Key Figures
What is Operating Margin? Formula, Example, and Interpretation
Operating margin shows what proportion of operating revenue remains as operating profit after deducting the costs of ordinary operations. This key figure makes it possible to compare the profitability of businesses of different sizes.
2 min read · Translated from Norwegian. Read the original
Operating margin shows what proportion of operating revenue remains as operating profit after deducting the costs of ordinary operations. This key figure makes it possible to compare the profitability of businesses of different sizes.
Formula
Operating Margin = Operating Profit / Operating Revenue × 100
If a company has NOK 20 million (Norwegian Kroner) in operating revenue and NOK 1.6 million in operating profit, the operating margin is 8 per cent.
What does the Operating Margin tell us?
A positive margin means that ordinary operations generated a profit before financial items and tax. A negative margin means that operating costs were higher than operating revenue.
The margin does not indicate how much cash the company has, how large its debt is, or how much needs to be invested. It must therefore be assessed in conjunction with liquidity, solvency, cash flow, and historical performance.
What is a good Operating Margin?
There is no universal threshold. Grocery retail may have a low margin and high turnover rate, while software and specialist services can have higher margins. Compare:
- the same company over several years
- companies with a similar business model
- the median in the relevant industry
- company accounts with company accounts, not consolidated accounts
Why does the margin change?
The margin can be influenced by prices, volume, cost of goods, wages, energy, currency, one-off costs, and changes in product mix. Acquisitions or divestments can break the time series.
Operating Margin and EBITDA Margin
The operating margin includes depreciation and amortisation through operating profit. The EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) margin adds these back. The difference is particularly important in capital-intensive industries.
How Proffi should display operating margin
Show the formula, underlying figures, currency, accounting period, and historical data. Allow the user to compare with a precisely defined industry. A quality flag should warn of altered accounting periods or missing comparative figures.
Frequently asked questions
- Is operating margin the same as profit margin?
- The terms are not always used identically. Provide the formula instead of assuming the reader knows the definition.
- Can a high operating margin hide risk?
- Yes. High debt, weak cash flows, customer concentration, or one-off effects can still present risks.
- Should the margin be compared with the previous year?
- Yes, but preferably over three to five years and against relevant competitors.