The calculation
Operating margin formula
Operating margin—also called operating profit margin—expresses operating income as a percentage of revenue. If operating income is not already reported, subtract cost of goods sold and other operating expenses from revenue.
Operating incomeRevenue − COGS − Operating expenses
Operating marginOperating income ÷ Revenue × 100
Operating cost ratioTotal operating costs ÷ Revenue × 100
Method references: Harvard Business School Online’s margin-ratio guide and the U.S. SEC guide to financial statements.
Use the correct subtotal
What belongs in operating expenses?
Operating income usually reflects the costs of running the core business. Depending on the company’s presentation, operating expenses can include selling, general and administrative costs, research and development, and depreciation and amortization. Interest and income tax normally appear below operating income.
- Use net sales when reported. Returns, allowances and discounts may already be deducted.
- Keep every figure in the same period. Do not divide quarterly operating income by annual revenue.
- Follow the statement’s labels. Company presentations can classify some income or expenses differently, so use the reported operating-income subtotal when possible.
Worked example
$90,000 of operating income on $500,000 of revenue
A business reports $500,000 of revenue, $260,000 of cost of goods sold and $150,000 of other operating expenses. Operating income is $90,000, producing an 18% operating margin. A 20% target at the same revenue would require $100,000 of operating income—a $10,000 improvement.
Read the sign
What a negative operating margin means
A negative result means operating costs exceeded revenue during the selected period. The calculator preserves operating losses instead of replacing them with zero. One period alone does not explain the cause: changes in sales volume, pricing, direct costs, staffing, depreciation or unusual operating items may all affect the result.
Use a target as a planning reference, not a universal benchmark. Appropriate operating margins vary substantially by industry, business model and reporting definition.
Choose the right metric
Operating margin versus EBITDA margin
Operating margin uses operating income. EBITDA margin adds depreciation and amortization back to earnings before interest and tax, so it can be higher for asset-intensive businesses. Net margin goes further down the income statement and includes interest, tax and other non-operating items.
- Operating margin: core operations after operating expenses.
- EBITDA margin: excludes depreciation and amortization as well as interest and tax.
- Net margin: the bottom-line profit relative to revenue.