Operating Margin

Operating income divided by revenue: the percentage of revenue left after paying all operating costs -- production, marketing, R&D, and administration -- but before interest and taxes. A company with a 20% operating margin keeps 20 cents of operating profit from every dollar of sales, so the ratio measures how efficiently it runs its core business. In the value-driver tree, the after-tax version (NOPAT margin) is one of the two factors that multiply to produce ROIC, alongside capital turnover: high-margin businesses (branded consumer, software, specialty pharma) earn their returns mainly through pricing power, while low-margin businesses (grocery, discount retail, distribution) earn theirs mainly through asset velocity.

Lessons that use this term

• The Income Statement: How Much Did They Earn?
• Profitability Ratios: How Much Does the Company Keep?
• Elasticity: Why Some Companies Have Pricing Power
• Costs of Production: Reading a Company's Margin Structure
• Perfect Competition: Why Commodity Businesses Struggle
• Monopoly Power: The Economics Behind Competitive Moats
• Externalities: ESG Risks and Regulatory Costs
• From Economics to Stock Analysis

Related terms

Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta

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