Operating margin: what it tells you about a business
How operating margin works, why it differs so much between industries, and what a rising or falling margin can mean.
Definition
Operating margin is operating profit divided by revenue. An operating margin of 20% means that for every $100 of sales, about $20 is left after paying for the products, the staff, research and the other costs of running the business, but before interest and taxes.
Why industries differ
Software and payment networks can run margins above 30% because each extra sale costs very little. Grocers and distributors often run below 5% because they resell physical goods at thin mark-ups and win on volume. So a margin only means something next to companies that do similar work.
Direction matters
A widening margin can mean pricing power, scale, or cost cuts. A narrowing margin can mean competition, rising input costs, or heavy investment that has not paid off yet. The Management’s Discussion section of the 10-K is where the company explains which it is.