Operating Margin

The more effecient a company creates products or provides services, the more profit it generates.

How to use operating margin

An operating margin of 20% means the company generated $0,2 for each $1 in revenue (before taxes).

Why do investors use operating margin in their analysis

To determine how much profit the company is making from it’s core business.

The three steps every investor should look at:

Things to be aware of

How to calculate operating margin

Real life example

A real life example of Tesla. You need the following data to determine operating margin:

Tesla generated $0,145 for each $1 of sales (before taxes).

Operating margin is used to calculate how much profit a company makes after variable costs of production but before paying interest and taxes. Some variable costs examples are wages, raw materials, packaging, and transaction fees. The amount of variable costs is different for each company and industry. In general, a higher operating margin is better as this implicates that a company is running efficiently. 

For investors, a higher operating margin is a good sign. Although you should always look at operating margin in the long term. If operating margin is fluctuating over the years this might be a sign that things are not running efficiently enough. It’s a way to check how much profit a company is making from its core business.

Operation earnings can be calculated in multiple ways:

Don’t worry about all the terms, I already calculated the operation margin for every company. Just use the search bar at the top of this page and fill in the ticker symbol of the stock you want to check. A healthy operating margin is above 15%. Always compare operating margin between the same type of companies and industries.