Operating margin: formula, examples and how to read it across business units

Operating margin is operating profit, also called operating income, divided by revenue. Operating profit is what is left after cost of goods sold and every operating expense, including depreciation, but before interest and income tax. A company with operating profit of $288,000 on revenue of $2,400,000 has a 12.0% operating margin: 12 cents of each sales dollar left after running the business.

Formula and what is in operating profit

Operating margin = Operating profit / Revenue × 100

Operating profit = Revenue − Cost of goods sold − Operating expenses

Operating expenses include selling, general and administrative costs, research and development, and depreciation and amortization. Below operating profit sit interest, investment income and income tax. On the one-year P&L used by the profit margin calculator:

The SEC's beginners' guide to financial statements puts it the same way: after operating expenses are deducted from gross profit "you arrive at operating profit before interest and income tax expenses. This is often called 'income from operations.'"

Operating profit, EBIT and EBITDA

The three are close and often confused.

• EBIT is net income plus interest and tax. Here, 189,000 + 36,000 + 63,000 = $288,000, the same as operating profit, because this company has no other non-operating items. When there is investment income, a foreign exchange gain or a one-time item below the operating line, EBIT and operating profit differ.
• EBITDA adds depreciation and amortization back to operating profit, so it is always higher for a company with assets. EBITDA margin covers that measure and why its ranking of companies can flip.

Worked: three business units

One group, one fiscal year, the same totals as above. Each unit's operating profit is before central costs; the central line sits in the group's operating expenses.

Distribution's margin is 112,000 / 1,400,000 = 8.0%. The units together earn 360,000 / 2,400,000 = 15.0% before central costs. After $72,000 of unallocated head-office cost, the group earns 12.0%. Show the central line: without it the units add to $72,000 more than the group reports.

The check: the group margin is revenue-weighted

The simple average of the three unit margins is (8.0 + 20.0 + 32.0) / 3 = 20.0%. The true combined figure is 15.0%, because Distribution is 58.3% of revenue and earns the lowest margin. Weight each unit by its revenue share and the 15.0% comes back exactly: 0.583 × 8.0 + 0.250 × 20.0 + 0.167 × 32.0. In Excel, with revenue in column B and operating profit in column E:

=SUM(E2:E4)/SUM(B2:B4)

never =AVERAGE(F2:F4). Count-weighted and value-weighted explains the difference. The roll-up must also tie: the unit columns plus central costs must equal the group income statement, line by line, as in the roll-up definition. When units report in different currencies, convert before summing; the exchange rates belong in the roll-up, not in the units' margins.

Operating leverage: why margin moves faster than revenue

Services has variable costs of 40% of revenue ($240,000) and fixed costs of $240,000. Grow its revenue by 10%:

Revenue rises 10%; operating profit rises 30%, from 120,000 to 156,000.

Degree of operating leverage = % change in operating profit / % change in revenue = 30% / 10% = 3.0

The same leverage works downward: a 10% fall in revenue takes 30% off operating profit. Units with high fixed costs show the widest swings in margin from month to month.

Operating income under US GAAP, and IFRS 18

US GAAP requires no operating-income subtotal. The SEC's Regulation S-X, Rule 5-03 lists the income statement captions (net sales, costs applicable to sales, other operating costs, selling, general and administrative expenses, non-operating income, interest, income before income taxes), and most US companies present an operating income line built from them. What goes in it varies: gains on asset sales, restructuring costs and other income land above the line at one company and below it at another. Read the face of the statement before comparing two operating margins.

IFRS reporters get a defined subtotal. IFRS 18 requires an operating profit subtotal for annual periods beginning on or after January 1, 2027. From then, IFRS operating margins will be more consistent with each other, but not automatically comparable with US GAAP ones.

What is a good operating margin

It depends on the industry. Aswath Damodaran's margins by industry, using US company data as of January 2026, give these pre-tax unadjusted operating margins:

Compare each unit with its own industry, not the group with one average. Then watch your own trend month by month.

Where it goes wrong

• Averaging unit margins. The group is total operating profit over total revenue: 15.0% before central costs, not 20.0%.
• Unallocated central costs. Unit operating profits add up to more than the group's. Show the central line.
• Gains inside operating profit. A gain on an asset disposal or other income lifts the margin without any trading.
• EBIT taken as operating profit. With material non-operating items, the two differ.
• Different accounting choices. Companies that capitalize more cost, or account for leases differently, report higher operating margins for the same business.

Reporting it every month

Operating margin by unit belongs in the monthly commercial pack, with the central line shown and the roll-up tied to the group P&L. Covirage's tools roll operating profit up the reporting hierarchy from your ledger export, divide totals rather than averaging unit ratios, and check that the roll-up ties to the group; the external AI model explains which unit moved the margin and never does the arithmetic. See FP&A reporting, and net profit margin for the margin after interest and tax. For the margin before operating expenses, see gross profit margin, and for the measure that adds depreciation back, see EBITDA vs operating income.