Operating Profit Margin

Understanding operating profit margin

Operating profit margin serves as a metric for a company's operational efficiency, calculated by dividing the operating profit by the revenue. It reflects the remaining portion of each revenue dollar after covering the company's operating expenses, indicating its profitability in relation to revenue.

Key differences between operating profit margin and net profit margin

Operating profit margin, or OPM, is a measure of a company's efficiency in operations. It is computed by dividing the operating income by the net sales. OPM helps evaluate a company's capability to generate profits from its operating activities.

An operating profit margin exceeding 10% is deemed favorable, while anything below 5% is considered inadequate.

The operating profit margin is also known as the "operating income margin" or the "operating profit ratio."

Several illustrations exemplify the calculation of operating profit margin:

• Company A with net sales of $100,000 and operating income of $10,000 results in an operating profit margin of 10% ($10,000/$100,000).
• Company B with net sales of $1,000,000 and operating income of $100,000 shows an operating profit margin of 10% ($100,000/$1,000,000).
• Company C with net sales of $10,000,000 and operating income of $1,000,000 exhibits an operating profit margin of 10% ($1,000,000/$10,000,000).
• Company D with net sales of $100,000,000 and operating income of $10,000,000 displays an operating profit margin of 10% ($10,000,000/$100,000,000).
• Company E with net sales of $1,000,000,000 and operating income of $100,000,000 manifests an operating profit margin of 10% ($100,000,000/$1,000,000,000).

Distinguishing itself from the net profit margin, the net profit margin is determined by dividing the net income by the net sales. It measures a company's overall profitability.

An adequate net profit margin is above 10%, while anything below 5% is deemed unsatisfactory.

Here are a few examples of calculating the net profit margin:

• Company A with net sales of $100,000 and net income of $10,000 results in a net profit margin of 10% ($10,000/$100,000).
• Company B with net sales of $1,000,000 and net income of $100,000 exhibits a net profit margin of 10% ($100,000/$1,000,000).
• Company C with net sales of $10,000,000 and net income of $1,000,000 displays a net profit margin of 10% ($1,000,000/$10,000,000).
• Company D with net sales of $100,000,000 and net income of $10,000,000 showcases a net profit margin of 10% ($10,000,000/$100,000,000).
• Company E with net sales of $1,000,000,000 and net income of $100,000,000 manifests a net profit margin of 10% ($100,000,000/$1,000,000,000).