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

Operating Profit Margin

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Source: Operating Profit Margin (wallstreetmojo.com)

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

The first component is the operating profit.

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.

Now we will deduct the operating expenses from gross profit to find out the operating profit.

  • 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.

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

However, in 2015, Colgate’s EBIT Margin decreased significantly to 17.4%. This was primarily due to change in accounting terms for the CP Venezuela entity (as seen below)
EBIT Margin - Colgate 10K

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 profitability ratiosProfitability RatiosProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms.read more of all.

While finding out the profit margin, the investors should look at gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more 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
X100
Net Sales
0
X100= 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 find out the operating profit, 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.

Operating Margin (Net Sales)

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

Gross Profit

Now we will deduct the operating expenses from gross profit to find out the operating profit.

(Operating Profit)

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

formula for Operating Margin
Margin excel

Operating Profit Margin Formula Video

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