# Operating Profit Margin ## What is the Operating Profit Margin?

Operating Profit Margin is the profitability ratio which is used to determine the percentage of the profit which the company generates from its operations before deducting the taxes and the interest and is calculated by dividing the operating profit of the company by its net sales.

### Operating Margin Formula

It is avidly used by the investors because the investors can get to know how much a firm earns in terms of operating profit. Here’s the formula of operating margin –

Operating Margin Formula = Operating Profit/Net Sales * 100

For eg:
Source: Operating Profit Margin (wallstreetmojo.com)

In the above operating margin formula, we have two important components.

The first component is the operating profit.

• We get to the operating profit by deducting the and other operating expenses from the net sales. And if you look at the income statement of a company, you would be able to discover the quite well. The specialty of operating income is that it doesn’t include incomes and expenses except the incomes and expenses related to the operating profit.
• The second component in the above operating margin formula is net sales. We start the income statement with the gross sales. Gross sales are the total revenue earned by the company. But to find out the net sales, we need to deduct any sales return or sales discount from the gross sales.

And in the operating margin ratio above, we compare the operating profit and the net sales to find out the proportion.

### Example of Operating Margin

Let’s take a simple example to illustrate the operating margin formula.

You can download this Operating Margin Excel Template here – Operating Margin Excel Template

Here’re the few details of the income statement of YOU Matter Inc. –

• Gross Sales – \$564,000
• Sales Return – \$54,000
• Cost of Goods Sold – \$2,40,000
• Labour Expenses – \$43,000
• General & Administration Expenses – \$57,000

Find out the operating profit margin of YOU Matter Inc.

In this example, first, we need to find the net sales of YOU Matter Inc.

• Gross sales are \$564,000, and the sales return is \$54,000.
• Then the net sales would be = (Gross Sales – Sales Return) = (\$564,000 – \$54,000) = \$510,000.

To find out the gross profit, we need to deduct the cost of goods sold from net sales.

• Then the gross profit would be = (Net Sales – Cost of Goods Sold) = (\$510,000 – \$240,000) = \$270,000.
• The operating profit would be = (Gross profit – Labour expenses – General and Administration expenses) = (\$270,000 – \$43,000 – \$57,000) = \$170,000

Using the operating margin formula, we get –

• Operating Profit Margin formula = Operating Profit / Net Sales * 100
• Or, Operating Margin = \$170,000 / \$510,000 * 100 = 1/3 * 100 = 33.33%.

### Colgate Example

Below is the snapshot of Colgate’s Income Statement from 2007 to 2015.

• Colgate’s Operating Profit = EBIT / Net Sales.
• Historically, Colgate’s Operating Profit has remained in the range of 20%-23%

However, in 2015, Colgate’s decreased significantly to 17.4%. This was primarily due to change in accounting terms for the CP Venezuela entity (as seen below) ### Uses

There are many firms that emphasize net profit. The net profit is the result of the whole income and expenses rendered by a company. But if the net profit margin is higher, it doesn’t ensure the efficiency of a company. Rather, it may hide the actual profit generated by the operating efforts of the company.

That’s why the investors should look at operating profit. Since operating profit helps in finding out actually how much profit the companies have made from its operations, it ensures efficiency and profitability. And that’s the reason – it is one of the most significant of all.

While finding out the profit margin, the investors should look at margin and net profit margin; but along with that, they should look for operating margin, which will surely bridge the gap in understanding how a company is actually doing operationally.

### Operating Margin Calculator

You can use the following Operating Margin Calculator.

 Operating Profit Net Sales Operating Margin Formula =

Operating Margin Formula ==
 Operating Profit X 100 Net Sales
 0 X 100 = 0 0

### Calculate Operating Margin in Excel

Let us now do the same example of operating margin formula in Excel. This is very simple.

First, you need to find the Net Sales and Gross Profit, and then you will need to deduct the operating expenses from gross profit to , and then by using the operating Margin formula, we will calculate Operating Profit Margin.

You can easily calculate the operating margin ratio in the template provided.

First, we need to find the net sales of YOU Matter Inc.

Now, to find the gross profit, we need to deduct the cost of goods sold from net sales.

Now, By using the operating profit margin formula, we get –

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