Operating margin is operating profit divided by revenue, where operating profit is what remains after both direct costs and operating expenses but before interest and tax. It is often called EBIT, earnings before interest and tax. Because it stops short of financing and tax, it isolates how well the business trades rather than how it is funded or where it is domiciled.
That makes it the fairest of the three margins for comparison. Two companies with identical operations can show very different net margins purely because one carries debt and the other does not, but their operating margins will be close. Analysts lean on it heavily for exactly this reason.
The gap between gross margin and operating margin is the overhead load: rent, administration, sales and marketing, research, and every other cost of running the business rather than making the product. Watching that gap over time is a direct read on whether growth is being achieved efficiently or bought with ever-rising overhead.
The formula
revenue- Sales for the period
COGS- Direct cost of producing what was sold
Opex- Overhead: salaries, rent, marketing, administration
EBIT- Operating profit — earnings before interest and tax
How to use this calculator
- Enter revenue for the period.
- Enter cost of goods sold, direct costs only.
- Enter operating expenses, excluding interest and tax.
- The gauge shows operating margin; the overhead load appears below it.
Worked examples
A trading business at 1.2m revenue
Revenue of $1,200,000 less $660,000 of direct costs gives $540,000 of gross profit, a 45.0% gross margin. Overhead of $380,000 leaves EBIT of $160,000 and an operating margin of 13.33%.
What overhead costs in revenue terms
At a 45.0% gross margin, covering $380,000 of overhead needs $844,444 of sales. Every additional $10,000 of fixed cost therefore requires about $22,222 of new revenue simply to stand still.
How to read your score
Frequently asked questions
How does operating margin differ from net margin?
Operating margin stops before interest and tax. Net margin includes them. The difference reflects the capital structure and the tax position rather than trading performance.
Is operating margin the same as EBIT margin?
Yes, the two terms are used interchangeably. EBITDA margin is different again, because it also adds back depreciation and amortisation.
Where do one-off costs belong?
Genuinely exceptional items are usually shown separately so the operating margin reflects ongoing trading. Be sceptical of businesses that classify the same "exceptional" cost every year.
What is a good operating margin?
It is entirely sector-dependent. Supermarkets operate in low single digits, industrial manufacturers around ten, and software companies twenty or more. The trend in your own figure matters more than the level.
Operating margin reference
| Gross margin | overhead 10% of revenue | overhead 20% of revenue | overhead 30% of revenue | overhead 40% of revenue | overhead 50% of revenue |
|---|---|---|---|---|---|
| 20% gross | 10% | 0% | -10% | -20% | -30% |
| 30% gross | 20% | 10% | 0% | -10% | -20% |
| 40% gross | 30% | 20% | 10% | 0% | -10% |
| 50% gross | 40% | 30% | 20% | 10% | 0% |
| 60% gross | 50% | 40% | 30% | 20% | 10% |
| 70% gross | 60% | 50% | 40% | 30% | 20% |
Operating margin is simply gross margin minus overhead when both are stated as a share of revenue.
| Gross margin | Overhead $200,000 | Overhead $380,000 | Overhead $600,000 |
|---|---|---|---|
| 15% | $1,333,333 | $2,533,333 | $4,000,000 |
| 25% | $800,000 | $1,520,000 | $2,400,000 |
| 35% | $571,429 | $1,085,714 | $1,714,286 |
| 45% | $444,444 | $844,444 | $1,333,333 |
| 55% | $363,636 | $690,909 | $1,090,909 |
| 70% | $285,714 | $542,857 | $857,143 |
Break-even revenue is fixed overhead divided by the gross margin percentage.