Operating Margin vs Profit Margin

Operating Margin vs Profit Margin

Operating Margins vs. Profit Margins: Return on Sale vs. Take Home Profit

Operating Margin vs. Profit Margin: Understanding the difference between these two margin metrics is important to your investing profit.  So…

Read this blog post to learn how to use both operating margin and profit margin when you’re analyzing the shares of stock for investment.

Luckily the difference between operating margin and profit margin is easy to grasp. I’ll start by going over the definitions of each metric, and then show you how to use profit margin and operating margin together in action.

So here it goes:

Operating Margin Explained:

Operating Margin is a percentage measure of how much the company is earning on its revenues.  So if a company has an operating margin of 10%, it is earning 10 cents (before taxes and interest) on every dollar of sales. Over time, operating margin can show how a company is dealing with the cost of selling more goods.

A steadily improving operating margin might indicate a management team that is conscious of controlling sales expenses. On the other hand, deteriorating operating margins could be an early warning sign to deeper structural problems. If you’re still curious about it, you can read this blog post about what makes a good operating margin to learn more.

Next in the matter of analyzing operating margin vs. profit margin, let’s took a closer look at the latter…

Net Profit Margin Explained:

Net Profit Margin is a percentage measure of how much money your business is taking home on every dollar of revenue. Net profit is the best one-number look at how effectively a business is making money. To calculate net profit margin: Divide the profit your company makes by the sales. High profit margin business may trade at higher earnings multiples, but it may also indicate a strong competitive advantage. Companies with high net profits margins are always worth exploring further.

But one more thing you should know about net profit margins is:

Just like operating margin, net profit margin is best viewed in terms of trends over time, investors can grow their revenues most when looking at changes in profit margin over time. By following along with net profit margins (both in looking at quarterly reports and in listening to management’s commentary on these reports) you can really keep your finger on the pulse of the business. You’re likely to anticipates palpitations and stutters ahead of other investors.

So where operating margin is focused on the profitability of sales, the net profit margins are focused on the profitability of the company as a whole. But there’s one more thing you should keep in mind. So let’s wrap this up…

Difference Between Operating Margin and Profit Margin:

By now you should be seeing the difference between operating margin and profit margin. Operating margin is focused on sales profits. Net profit margin is the big picture profit margins after every phase of the business, including taxation and all other costs. When considering the difference between operating margin and profit margin there’s one more thing to consider…

If there is a big difference in the operating margin and the profit margin you should probably investigate why. It may just be a capital intensive business. But it pays to know. Keep an eye on how these margins fluctuate relatively to each other over time. Does that make sense?

Drop any questions in the comments below. Take some time calculating these margins on your favourite companies and compare them to industry peers. Digging through the differences between operating margins and profit margins is always interesting so I hope this post has helped you understand the difference between them.

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