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Operating Profit Margin

The Operating Profit Margin Ratio is another profitability ratio. It shows the proportion of revenues left after making the payment for the operations unrelated to the direct production of goods and services. Hence, it is also referred to as income from operations. It shows the margin left after paying the expenses related to the cost of overhead, manufacturing, selling and administrative and etc.

The operating profit margin ratio act as a key indicator for the creditors and the investors. By looking into this ratio, it helps them to evaluate the effectiveness of the company’s operations. The formula to compute this ratio is:

Operating Profit Margin Ratio = Operating Profit/Net Sales

Where, Operating Profit = Revenue – (Operating Expenses, Depreciation, Amortization, etc.)

The higher value of the operating profit margin ratio shows that the company is making enough profits from its operations to pay for the variable as well the fixed expenses.

For example, company A has a net sales of $10,000 and its cost of goods sold is $3,000. The other expenses such as staff cost,  rental cost and other operating cost are $3,000, $2,000, $1,000 respectively. Then, the operating profit margin will be:

= [10,000 – (3,000 + 3,000 + 2,000+ 1,200)] / 10,000

= 0.08 or 8%

The above example is just an illustration for an underperforming company. The company will need to think of how to further improve the company operation and hence, to improve the company’s operating profit margin.

 

Refer to two other useful profit margin ratios :

And also check out other profitability ratios.

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