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Definition

What is Operating Margin?

Profit after COGS and operating expenses, before interest and tax, as a percentage of revenue.

Operating margin measures how profitably the core business runs — it subtracts both direct costs and the overhead required to operate (salaries, rent, marketing, software) but excludes financing and tax effects. It is the cleanest comparison metric between businesses because it ignores capital-structure differences. A declining operating margin with stable gross margin signals overhead growing faster than revenue.

Formula

Operating Margin (%) = Operating Income ÷ Revenue × 100

Example

Revenue of $500,000 with $200,000 COGS and $210,000 operating expenses gives $90,000 operating income — an 18% operating margin.

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Related terms

  • Net Profit Margin — Profit remaining after all expenses — COGS, operating costs, interest, and tax — as a percentage of revenue.
  • Gross Margin — Revenue minus cost of goods sold, expressed as a percentage of revenue.
  • Burn Rate — The net cash a business loses per month when expenses exceed revenue.