0120122, 1:26 PM ‘Operating Profit Margin - Lear to Caleulale Operating Profit Margin Home > Resources > Knowledge > Finance > Operating Profit Margin Operating Profit Margin Operating profit divided by total revenue, expressed as a percentage Written by CFI Team Updated February 7, 2022 What is Operating Profit Margin? Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit a company produces from its operations before subtracting taxes and interest, charges. It is calculated by dividing the operating profit by total revenue and expressing it as a percentage. The margin is also known as EBIT (Earnings Before Interest and Tax) Margin. aot T Se CLUS res ee 2016 Pa Py Revenue 402,007 118,086 | 134,345] 142,341 «150,772 Cost of Goods Sold (COGS) 39,023 48,004 49,123 52,654 56,710 Gross Profit 62,984 70,082 82,222 89,687 94,062 Expenses Salaries and Benefits 26,427 22,658 23,872 23,002 25,245 Rent and Overhead 10,963 10,125 10,087 11,020 11,412 Depreciation & Amortization 19,500 18,150 17,205 16,544 16,080 Operating Expenses 56,890 50,933, 51,164 50,566 52,737 Operating Profit 6,094 19,149 | 34,058 39,422 44,325, Operating Profit Margin 6% 320F24 2% 7% Image: CFI’s Financial Analysis Courses. Operating Profit Margin differs across industries and is often used as a metric for benchmarking one company against similar companies within the same industry. It can reveal the top performers within an industry and indicate the need for further research regarding why a particular company is outperforming or falling behind its peers. How to Calculate Operating Profit Margin? hitpsicorporatefanceinsttute.comMresources/knawledgerfinanceloperating-profi- margin’ w0120122, 1:26 PM ‘Operating Profit Margin - Lear to Caleulale Operating Profit Margin Operating Profit Operating Profit Margin = Total Revenue Operating profit is calculated by subtracting all COGS, depreciation and amortization, and all relevant operating expenses from total revenues. Operating expenses include a company's expenses beyond direct production costs, such things as salaries and benefits, rent and related overhead expenses, research and development costs, etc. The operating profit margin calculation is the percentage of operating profit derived from total revenue. For example, a 15% operating profit margin is equal to $0.15 operating profit for every $1 of revenue, Operating Profit = Sales - COGS - Operating Expenses - Depreciation & Amortization How to Use Operating Profit Margin? Operating Profit Margin differs from Net Profit Margin as a measure of a company’s ability to be profitable. The difference is that the former is based solely on its operations by excluding the financing cost of interest payments and taxes. An example of how this profit metric can be used is the situation of an acquirer considering a leveraged buyout. When the acquirer is analyzing the target company, they would be looking at potential improvements that they can bring into the operations, The operating profit margin provides an insight into how well the target company performs in comparison to its peers, in particular, how efficiently a company manages its expenses so as to maximize profitability. The omission of interest and taxes is helpful because a leveraged buyout would inject a company with completely new debt, which would then make historical interest expense irrelevant. A company's operating profit margin is indicative of how well it is managed because operating expenses such as salaries, rent, and equipment leases are variable costs rather than fixed expenses. A company may have little control over direct production costs, such as the cost of raw materials required to produce the company's products. However, the company’s management has a great deal of discretion in areas such as how much they choose to spend on office rent, equipment, and staffing. Therefore, a company's operating profit margin is usually seen as a superior indicator of the strength of aco ~/s management team, as compared to gross or net profit margin. hitpsicorporatefanceinsttute.comMresources/knawledgerfinanceloperating-profi- margin’0120122, 1:26 PM ‘Operating Profit Margin - Lear to Caleuale Operating Profit Margin A 8 c ° E F 6 H t 1 ee 2 Sees 3 4 Revenue 102,007 118,085 131,345 142,341 150,772 5 _Costof Goods Sold (COGS) 39.023 48,004 49,123 52.654 56710 6 Gross Profit 62984 ——-70,082 ‘92,222 39,687 ‘94,062 7 Expenses 8 Salaries and Benefits 26427 22,658 23872 23,002 25,245 9 Rentand Overhead 10963 10125 10,087 11,020 1412 10 Depreciation & Amortization 19500 18,150 17,205 16544 15,080 11 Operating Expenses 56890 50.933 51,164 50,566 52,737 12 Operating Profit 6,034 19,148 31,058 39,122 “41,325 eC ne ee 15 Interest 2,500 2.500 1,500 1,00 1,500 16 _Other 8820 6225 1.659 3911 5,996 17 Total Expenses 210 «59,658 543323 55.977 60,233 18 Earnings Before Tax (6.226) 10428 «27,899 370 33,829 13 20 Taxes 4.120 4858 8483 10,908 11,598 21 Net Earnings (6.346) 5.566 19.416 22,802 22234 Image: CFI's Financial Analysis Courses. Your free Excel template is ready We hope that our resources will help you work better, faster, and ultimately advance your career in finance Limitations of Using the Operating Profit Margin Ratio hitpsicorporatefanceinsttute.comMresources/knawledgerfinanceloperating-profi- margin’112022, 1:26 PM ‘Operating Profit Margin - Lear o Calculate Operating Prot Marin As in any part of financial analysis, any number of interest requires additional research to understand the reasons behind the number. Discrepancies in operating profit margin between peers can be attributed to a variety of factors. For instance, a company pursuing an outsourcing strategy may report a different profit margin than a company that produces in- house. In comparing companies, the method of depreciation may yield changes in operating profit margin. A company using a double-declining balance depreciation method may report lower profit margins that increase over time even if no change in efficiency occurs. A company using a straight-line depreciation method would see a constant margin unless some other factor changes as well. A general rule is to hold factors such as geography, company size, industry, and business model constant when using operating profit margin as a comparison analytic between peers. Itis also useful to consider other profitability metrics alongside it, such as Gross Profit Margin or Net Profit Margin, as well as other financial metrics such as leverage, efficiency, and market value ratios. You can advance your expertise in financial analysis of companies’ money management and profitability by learning about the other aspects of corporate finance that are detailed in the articles listed below. More Resources Thank you for reading CF''s guide to Operating Profit Margin. To continue advancing your career, these CFI resources will be useful: Profitability Ratios Depreciation Expense Straight-Line Depreciation Financial Analyst Certification Program Share this article share on Linkedin leiShare on Facebook |#iShare on Twitter laiShare on WhatsApp .copy link hitpsicorporatefanceinsttute.comMresources/knawledgerfinanceloperating-profi- margin’