Operating Profit Margin

The operating margin measures how efficiently a company converts the revenue it generates into operating profit.

Formula

               Operating Profit Margin = Operating Profit / Net Sales

Example

Company ABC makes sales of Rs 100 Cr and the total operating expense is Rs 80 Cr. Then, the Operating profit is Rs 20 Cr (Rs 100 Cr – Rs 80 Cr) and Operating Profit Margin (OPM) is 20%.

For every Rs 1 of revenue, this company generates an operating profit of Rs 0.2

How to use practically

Operating Profit Margin is the single most important metric that Banks look at before giving any kind of loan to the company.

Having a high-profit margin is a good sign of the competitive strength of the company. Investors must look at the trend of the OPM before investing in the company.

The declining trend is a worrisome sign and the increasing OPM trend is a strong signal of the inherent strength of the business and tight cost control done by the management.

A business that is capable of generating operating profit is a positive sign for shareholders of the company and the lenders of the company.

This means that the company’s operating margin creates value for shareholders and lenders of the company.

In most businesses, most of the operating expenses go into buying raw materials and employee benefits (salary, pension, etc).

So it is necessary to know the trend of raw material price and hike/decline in the salary of employees to get a clearer picture of OPM.

Related Terms

ROIC

ROIC indicates how much profit is generated by the company for every Rs 1 of invested capital....

read more

Do you like Videos?

We got many concepts been explained in video format. You may like it!

An investment in knowledge pays the best interest.

— Benjamin Franklin

Feel Free to Ask Us

We wish to work more closely with our community. If you want us to share our insight on trading and investing, feel free to as us.

Do you wish to invest in stock market?

Stay Informed with EQSIS Tools and Services

Stock Market Training

3 days classroom traing + 30 days online practice. Here you can learn from basics to advance concept.

Intraday Scanner

We have best in-class intraday scanner which helps you in stock selection.

Follow Us

You can joins us using your prefered social network