Operating margin
Operating profit over revenue. It stops above interest, so two identical businesses financed differently share it — which is what makes it comparable.
Where you will meet it
Operating margin appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Work out profitability margins and explain what they mean
“Operating margin subtracts operating expenses and reflects the efficiency of the business before financing and tax.”
- Work out return on invested capital and explain what it reveals
“ROIC can be decomposed as after-tax operating margin times capital turnover.”
- Explain exposure to foreign currency transactions, including how the resulting gains and losses are accounted for and disclosed
“Neither IFRS nor US GAAP says where the gain or loss sits in the income statement, so some firms show it in operating profit and others below it, which hurts comparability of operating margins.”
- Break return on equity into its parts with DuPont analysis
“The five-part version splits the margin further into a tax burden, an interest burden and an operating margin, which isolates operating performance from financing and tax.”
See also
Practise it
Practise operating margin until it is automatic: questions that explain every wrong option.
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