Operating margin (EBIT margin)

The formula

• m = 100 · R / I

R is the operating profit, EBIT, and I the revenue. The percentage is what is left of each unit sold after the goods, the staff, the rent and the depreciation, but before the lenders and the tax authority are paid.

A worked example

A business with revenue of 2,000,000 and an operating profit of 250,000 has an operating margin of 100 · 250,000 / 2,000,000 = 12.5%. Turned round, a target margin of 12.5% on revenue of 3,200,000 means an operating profit of 400,000.

Three margins, one income statement

The gross margin takes off the cost of the goods only. The operating margin takes off the running costs as well. The profit margin takes off interest and tax too and is the smallest of the three. A business can have a healthy gross margin and no operating margin: the goods are sold at a mark-up and the overheads eat it. The operating margin is the one that says whether the business itself works, apart from how it is financed.

Operating or EBITDA margin

The EBITDA margin adds the depreciation back and reads higher. For a business with heavy assets the two can be far apart, and the operating margin is the one that charges for wearing them out.

Common mistakes

• Dividing by profit instead of revenue. The margin is a share of sales.
• Mixing periods or currencies between the two figures.
• Reading one year. A margin that swings from 12.5% to 3% says more than either year alone.

Frequently asked questions