Investing term
What is Operating margin?
Operating income as a percentage of revenue — how much survives all operating costs.
Operating margin is operating income as a percentage of revenue — how much profit the core business produces per sales dollar, before interest and taxes. A company with $100M revenue and $18M operating income has an 18% operating margin.
It's a key efficiency gauge for the business itself, sitting between the product-level gross margin and the all-in net margin. A rising operating margin signals a business gaining leverage and discipline — turning each extra dollar of sales into more profit as costs grow more slowly than revenue. A falling operating margin warns that costs are outpacing sales, whether from rising production costs, bloated overhead, or fading pricing power. Because it excludes financing and tax, it's a clean, comparable measure of how profitably a company runs its actual operations.
Operating margin is operating income as a share of revenue — how much survives all operating costs, before interest and tax. A rising one signals operating leverage; a falling one, costs outpacing sales.
For example
A company lifting its operating margin from 15% to 18% over a few years is turning more of each sales dollar into operating profit — a sign of improving efficiency.
Learn it by doing
That's Operating margin in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 14, Reading Financial Statements).
Try the free lesson →Why it matters to you
Operating margin matters because it tracks the profitability and efficiency of the core business over time, cleanly separated from financing and tax. A widening operating margin is one of the most encouraging signals in fundamental analysis — evidence of operating leverage and cost discipline — while a shrinking one is an early warning of deteriorating economics. Comparing operating margins within an industry also reveals which companies run their operations most profitably.
⚠ Comparing operating margins across industries
Like all margins, operating margins vary widely by industry, so comparing a software company's to a retailer's tells you little. A margin that's strong in one sector is weak in another. Operating margin is most meaningful compared within an industry and tracked over time for the same company, not used as a cross-industry measure.