Operating margin

Operating profit as a percentage of revenue - what is left after the costs of running the business but before interest and tax. It asks whether the business around the product makes money.

Example

Northgate's operating profit of 550,000 on 4,200,000 is 13.1%, up from 440,000 on 3,500,000, which was 12.6%.

Important

Because it sits above interest and tax, it is the cleanest layer for comparing two companies with different borrowing and different tax positions.

Related terms

• Gross margin — Gross profit - revenue less the cost of goods sold - expressed as a percentage of revenue. It asks whether the thing being sold makes money.
• EBITDA — Earnings before interest, tax, depreciation and amortisation - in practice, operating profit with the depreciation and amortisation charge added back.
• Interest coverage — Operating profit divided by the interest charge - how many times over the year's earnings could pay the year's cost of borrowing.

Lessons that explain it

• The income statement: what it claims was earned — The income statement is a claim about performance over a period, assembled under rules that deliberately ignore when the cash moved. Read properly it is the most useful statement; read literally it is the most misleading. (12 min)

All 578 terms in the Investing glossary