What this calculator does
Operating margin is what remains of each sales dollar after both the cost of the goods and the cost of running the business. It sits below gross margin and above interest and tax, which makes it the cleanest view of whether the operation itself works.
The distance between the two margins is where the story usually is. A steady 40.0 per cent gross margin with operating margin falling from 20.0 to 5.00 per cent says nothing went wrong with pricing or sourcing, and everything went wrong with overheads.
The formula
Operating income is revenue less cost of goods sold less operating expenses. Dividing by revenue gives the margin, and gross margin is shown alongside for comparison.
| Term | Meaning |
|---|---|
| Operating margin | Operating income as a percentage of revenue. |
| Gross margin | Revenue less cost of goods only, before operating expenses. |
| Operating expenses | Selling, general and administrative costs, which sit between the two margins. |
The inputs explained
| Field | What to enter |
|---|---|
| Revenue ($) | Total revenue for the period. |
| Cost of goods sold ($) | Cost of goods sold, being the direct cost of what was sold. |
| Operating expenses (SG&A etc.) ($) | Operating expenses: selling, general, administrative and similar running costs. |
When to use it
Tracking whether overheads are under control
A stable gross margin with a falling operating margin points straight at operating costs.
Comparing against competitors
Operating margin is the standard basis for comparing operating efficiency within a sector.
Assessing scalability
Operating margin widening as revenue grows is the signal that fixed costs are being spread.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How much do overheads compress the margin?
The same gross margin at three levels of operating expense.
| Operating expenses | Operating margin | Operating income |
|---|---|---|
| $200k | 20.0% | $200,000.00 |
| $250k | 15.0% | $150,000.00 |
| $350k | 5.00% | $50,000.00 |
Questions
What is a good operating margin?
It varies by industry more than almost any other ratio. Software regularly exceeds 25 per cent, grocery retail runs at 2 or 3 per cent, and both can be healthy businesses. Compare against sector peers, never against a general figure.
How does it differ from net margin?
Net margin is after interest and tax as well. Operating margin deliberately excludes both, so two companies with different debt levels or in different tax jurisdictions remain comparable on operations.
Why look at gross margin alongside it?
Because the gap between them isolates where a change came from. If gross margin moved, the cause is pricing or input costs. If only operating margin moved, the cause is overheads.
Is a rising operating margin always good?
Usually, but not if it comes from cutting spending that the business needs. Reduced marketing or deferred maintenance lift the margin this year and cost more later, which one period in isolation cannot show.
For the fuller breakdown of returns, see the DuPont analysis calculator. For a measure before depreciation, see the EBITDA calculator.