Glossary
operating margin
Also called operating profit margin, EBIT margin
Operating margin is the share of revenue left as profit after both the direct costs of sales and the running costs of the business, but before interest and tax.
- How it's calculated
- Operating margin % = Operating profit ÷ Revenue × 100
- Operating profit is revenue less cost of sales less operating costs such as salaries, rent, software and marketing. It excludes interest and tax, so it measures the trading business rather than how it is financed.
If gross margin asks whether each sale is worth making, operating margin asks whether the business around those sales is the right size.
What the gap between the two tells you#
A business with a 67% gross margin and a 21% operating margin is spending 46 points of revenue on overheads. Whether that is healthy depends on the industry, but the direction of travel matters more than the level: if gross margin holds steady while operating margin falls, the cost base is growing faster than the business.
Why interest and tax are excluded#
Two businesses can trade identically and report different profits after tax because one carries debt and the other does not, or because they operate in different tax regimes. Stopping at operating profit lets you compare the trading operation itself, which is why lenders and investors look at it closely.