Profitability Ratios - Operating Margin

Operating Margin is used to measure a company's pricing strategy and operating efficiency. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. 


Operating Margin  = Operating Income / Net Sales


Note :- Operating margin gives an idea of how much a company makes (before interest and taxes) on each rupee of sales. If a company's margin is increasing, it is earning more per rupee of sales. The higher the margin, the better. A higher operating margin means that the company has less financial risk.


Illustration :-
This is key highlights of 2nd Quarter Result 2010- 2011 declared by Reliance Industries Limited on 30 Oct 2010.

From this Highlights we have relevant information to calculate Operating Margin:-
Operating Income of Q2 FY11 = Rs. 10,068 cr.
Net Sales of Q2 FY11 = Rs. 57479 cr. (Took from the "Profitability Ratios - Gross Margin" Post)
So, Operating Margin = Operating Income / Net sales
Operating Margin = 10,068 / 57,479 = 0.17
Analysis :- 
So, Operating Margin is 0.17 means Company makes Rs. 0.17 paise (before interest and taxes) on each rupee of sales for Q2 FY11.