Operating Profit Margin Ratio Analysis

Operating Profit Margin (also known as EBIT to sales ratio, return on sales, or operating margin) is a type of profitability ratio used to measure the Operating Profit in relation to the Net Sales. A higher ratio is better because it indicates that the company can keep its costs under control (with lower fixed cost). It can also mean that sales are increasing faster than costs.

Formula:
Operating Margin = operating income / sales

Example 1:
Western plc has the following data:
Net Operating Revenues $30,000
Gross Profit $25,000
Operating Income $10,000
Net Income $8,000
Income Before Taxes $15,000

Then,
Operating Margin = 10,000 / 30,000 = 33.33%

Example 2:
ABC Company has the following information:
Revenue = $500,000
Cost of Goods Sold = $280,000
Gross Profit = $220,000
Operating Cost = $30,000
Interest Expense = $10,000
Operating Profit = $180,000

Then,
Operating Profit Percentage = 180,000 / 500,000 = 36%

* Next: Operating Cash Flow Per Share