Operating profit margin is one of the profitability ratios used to gauge the operating profitability of a firm. This ratio represents the relationship between operating profit and net sale of a firm.
Operating profit is calculated by subtracting the amount of cost of goods sold (COGS) and operating expenses from total sales. This is the profit which includes interest and taxes amount. That’s why, it is also known as ‘Earning before interest and taxes (EBIT)’.
Operating profit margin is also known as ‘Operating margin’.
Formula for calculation of operating profit margin:
Operating margin is calculated by dividing the amount of operating profit by net revenue (net sale).
Operating profit ratio = Operating profit/ Net sale
As operating profit is calculated by deducting the amount of operating expenses from the amount of gross profit, below formula can also be used in calculation of operating margin
Operating profit ratio = (Gross profit – Operating expenses)/ Net sales
The higher degree of this ratio shows that management is effectively generating profit while incurring lower operating costs.