Operating margin

In

Return on sales (ROS) is net profit as a percentage of sales revenue. ROS is an indicator of profitability and is often used to compare the profitability of companies and industries of differing sizes. Significantly, ROS does not account for the capital (investment) used to generate the profit. In a survey of nearly 200 senior marketing managers, 69 percent responded that they found the "return on sales" metric very useful.^[1]

Unlike

Net profit measures the fundamental profitability of the business. It is the revenues of the activity less the costs of the activity. The main complication is in more complex businesses when overhead needs to be allocated across divisions of the company. Almost by definition, overheads are costs that cannot be directly tied to any specific product or division. The classic example would be the cost of headquarters staff.[1]

Net profit: To calculate net profit for a unit (such as a company or division), subtract all costs, including a fair share of total corporate overheads, from the gross revenues.^[1] $${\displaystyle {\text{Net profit}}\ (\$)={\text{Sales revenue}}\ (\$)-{\text{Total costs}}\ (\$)}$$

Return on sales (ROS): Net profit as a percentage of sales revenue.^[1] $${\displaystyle {\text{Return on sales}}\ (\%)={\frac {{\text{Net profit}}\ (\$)}{{\text{Sales revenue}}\ (\$)}}}$$

$${\displaystyle {\text{EBITDA}}\ (\$)={\text{Net profit}}\ (\$)+{\text{Interest Payments}}\ (\$)+{\text{Taxes Incurred}}\ (\$)+{\text{Depreciation and Amortization Charges}}\ (\$)}$$Example: The Coca-Cola Company

$${\displaystyle {\text{Operating margin}}={\tfrac {6,318}{20,088}}={\underline {\underline {31.45\%}}}}$$

It is a measurement of what proportion of a company's revenue is left over, before taxes and other indirect costs (such as rent, bonus, interest, etc.), after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, such as interest on debt. A higher operating margin means that the company has less financial risk.

Operating margin can be considered total revenue from product sales less all costs before adjustment for taxes, dividends to shareholders, and interest on debt.

• Efficiency ratio
• Incremental operating margin
• Profit margin

• Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.