How do you calculate operating margin?
The short answer
Operating margin = operating profit ÷ revenue × 100. Operating profit is revenue minus cost of sales minus operating expenses, including depreciation and amortisation but before interest and tax.
It shows how much of each sale is left after running the business, before financing costs and tax.
Every figure shown here is invented for illustration. Nothing on this page is computed from anyone’s accounts.
An engineering consultancy keeps 18 cents of every dollar of revenue
An invented consultancy's June trial balance, mapped:
| Line | June ($) |
|---|---|
| Revenue | 540,000 |
| Cost of sales | 221,000 |
| Gross profit | 319,000 (59.1%) |
| Operating expenses, before depreciation | 204,000 |
| EBITDA | 115,000 (21.3%) |
| Depreciation and amortisation | 18,000 |
| Operating profit (EBIT) | 97,000 |
| Interest | 6,000 |
| Profit before tax | 91,000 |
Operating margin = 97,000 ÷ 540,000 × 100 = 18.0%
Three margins answer three different questions
| Margin | Formula | Answers |
|---|---|---|
| Gross margin | (Revenue − cost of sales) ÷ revenue | Do we make money on what we sell? |
| EBITDA margin | EBITDA ÷ revenue | Do operations make money before asset and financing choices? |
| Operating margin | Operating profit ÷ revenue | After paying for the assets we use, are we profitable? |
In an asset-heavy business (fleets, plant, fit-outs) the gap between EBITDA margin and operating margin is large. That gap is depreciation, the cost of the assets wearing out, and its board should watch operating margin, not EBITDA alone. See EBITDA in an MIS.
Depreciation needs a line of its own in the mapping
- Depreciation mapped to its own line, not buried in overheads, or EBITDA and operating profit can't be told apart.
- Interest below operating profit; routine bank charges usually stay in operating expenses. Pick a rule and keep it.
- One-off items, such as a restructuring or a settlement, stay in operating profit but are named in the commentary, so the trend isn't misread.
What moves operating margin
- Price and mix, which move gross margin and flow straight through.
- Operating leverage. Overheads are mostly fixed, so growth lifts the margin and a fall in revenue squeezes it faster.
- Hiring ahead of revenue, which lowers it for a few months. Say so, or the board will read it as decline.
- Depreciation steps after a large asset purchase, which last for years.
Compare with the same month last year, and a rolling three months with the three before, rather than month on month: one month swings with when invoices were raised.
Three ways operating margin misleads
- Depreciation booked only at the year end. The margin looks better for eleven months and collapses in the twelfth. Book it monthly.
- Owners' costs through the business. Personal expenses understate the margin; an owner who takes no salary overstates it.
- A month compared with a year. Compare like with like.
Gross margin and EBITDA margin come built in; operating margin is one request away
Magic MIS computes gross margin and EBITDA margin from every month's trial balance, with depreciation on a line of its own. Operating margin is in its KPI library: added to the board through the chat as operating profit ÷ revenue, and from then on worked out by the engine each month like every other figure. Each opens to the ledgers behind it.
What people ask about operating margin
Is operating margin the same as EBIT margin?
For most small and medium businesses, yes: operating profit and EBIT are used interchangeably.
What is a good operating margin?
It varies widely by industry: low single digits in distribution, fifteen to thirty percent in many professional services. Compare with the business's own history and its genuine peers.
Should owners' salaries be in operating expenses?
Yes, at a market rate. Where owners take dividends instead, say so: the margin will look better than a comparable company's.
Read next
- How do you calculate gross margin from a trial balance?(Revenue − direct costs) ÷ revenue × 100, with closing stock taken off direct costs. A worked example showing what the stock adjustment changes, and which ledgers count.Read
- How is EBITDA calculated in an MIS report?Revenue less direct costs, employee costs and other operating expenses, with other income kept below it. A worked example from EBITDA down to profit before tax.Read
- AI variance analysis: flux commentary written from computed figuresWhich movements matter and why, not every change: month-over-month variances computed from your trial balance, filtered by materiality and written up, every figure traceable.Read
Have every margin computed from your trial balance
Create an account, load last month's trial balance, and get the report — paid per action.
Prepaid credits, no subscription.