Operating Margin

Operating margin measures the profitability of a company's core operations: operating income (revenue minus cost of goods sold and operating expenses, also called EBIT) divided by revenue. It strips out interest and taxes to isolate how efficiently the actual business converts sales into profit.

It sits between gross margin and net margin on the income statement. Gross margin reflects only direct production costs; operating margin also absorbs overhead — R&D, sales, marketing, and administration — so it captures the efficiency of the whole operating engine, not just unit economics. Net margin then layers on financing and tax effects that have nothing to do with operations.

Because it excludes capital structure and tax, operating margin is the cleanest cross-company profitability comparison within a sector, and the trend matters as much as the level: expanding operating margin signals genuine operating leverage — revenue growing faster than costs — while a compressing margin warns of rising costs or pricing pressure before it shows up in net income.