Operating Profit Margin Calculator
Our operating profit margin calculator is a tool that calculates the percentage of a company's revenue that is left after subtracting operating expenses, which gives an indication of the company's profitability from its core business operations.
Jan 15 2021
- Use The Calculator
- Calculator Instructions
- What Is Operating Profit Margin?
- How do you calculate operating profit margin?
- Is high operating profit margin good?
- Is low operating profit margin bad?
- What is an ideal operating profit margin?
You only need to enter two figures to calculate your operating profit margin: Operating profit and Revenue. Your operating profit is just gross profit minus operating expenses. Once you have the value for operating profit and revenue simply enter them into the calculator and press the "Calculate" button. Instantly your operating profit margin will be displayed as a percentage.
What Is Operating Profit Margin?
Operating profit margin is a measure of how well a company can generate profit. If the operating profit margin is decreasing over time it means that costs are rising faster than sales, which is typically a bad sign. On the other hand, if operating profit margin is increasing over time sales are rising faster than costs, which tends to be a good sign.
Operating profit margin provides deeper insight than gross profit margin because it considers operating expenses. Since operating expenses can be optimised by effective management, operating profit margin can be one effective measure to judge managerial performance.
How do you calculate operating profit margin?
Operating Profit Margin is calculated as Operating Profit divided by Revenues for a given period. Operating profit margin indicates how effective a company is at controlling the costs and expenses associated with their normal business operations, assuming the Gross Profit Margin to be reasonably constant.
Is high operating profit margin good?
To have a high operating profit margin a company must be very efficient at generating sales. A high operating margin is achieved when for every pound of revenue generated, a large chunk of that revenue is profit and a small amount is required to cover operating expenses.
A high operating profit margin is considered to be an indicator of a healthy company and so a high operating profit margin percentage is good. However, it is not easy to define what a high percentage actually is. This is because different industries have very different costs. A low margin in one industry might be considered a high margin in another industry. While it is easy to look at a company's margin trend over time and judge whether company performance is improving or deteriorating, comparing margin percentages between industries and even companies is much more complicated.
Is low operating profit margin bad?
A low operating profit margin is not necessarily bad, if it is in line with industry norms. However, if a company has a margin lower than industry norms it indicates that they are going to come under financial pressure because they are less efficient at converting revenue to profit than their competitors.
The trend of operating profit margin over time is perhaps more important than the absolute value. If margin is steadily falling over time it could indicate that a company is becoming less and less healthy.
What is an ideal operating profit margin?
The ideal profit margin will vary from one industry to the next. This is because different industries have different cost profiles. Some are machine intensive, some are labour intensive and some are based around intangibles that have minimal costs.
Even for a the same company, the ideal profit margin can change over time. Auto Trader, a company traded on the FTSE 100, originally published a print based car buyer magazine with circulation peaking in January 2000 at 368,000 copies per week. Company records show that for the year ending 2nd April 2000 the operating profit margin stood at 25%. However, as the company transitioned towards being purely online publisher operating margins increased significantly.
|Year||Revenue||Operating Profit||Operating Profit Margin|
What we can see is that Auto Trader is a completely different business now to the one that circulated printed magazines. It is difficult to assess whether the 70% margin achieved in 2022 is better than the 25% achieved in 2000. This is because the business model of offering an online car marketplace was not available in 2000.
What is evident though, is that the trend is positive with operating profit margin increasing steadily. This suggests that management have done an effective job of controlling operating expenses while the business has scaled it's online business.
Data published in the US shows that average operating profit margins for S&P 500 companies stood at around 18% through 2022. However, comparing across industries confirms that these margins can vary significantly. For example, the average operating margin for the Aerospace & Defence industry is 8% while for the Alcholic Beverages Industry operating margin peaked at 39.95% in Q3 2022.
Frequently Asked Questions
Have a question about this calculator? See our list of frequently asked questions below.
What is operating profit margin?
Operating profit margin is operating profit, or earnings before interest and tax are deducated, divided by revenue.
What is operating profit margin used for?
Operating profit margin can be used to assess how effectively a company can generate profits.
What is the formula for calculating operating profit margin?
Operating Profit Margin = Operating Profit / Revenue
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