Operating Income Margin

Operating Income Margin – a profitability ratio measuring the amount of operating income (gross profit minus operating expenses) generated by a dollar of sales. The ratio can be computed by dividing the operating income of the company by its net sales.

Operating income margin measures the percentage of money that is left after excluding costs of goods sold and operating expenses from the net revenue, comparing to company's net sales. Obviously, the higher the operating income margin is, the better the company performs, because this means it generates more operating earnings. Generally, enterprises that demonstrate increasing trend of the operating income margin are improving the efficiency of controlling their overall costs. Higher operating income margin also means less financial risk for a company and ability to pay its fixed costs, such as interest expenses.

Resolving the problems with the operating profit margin exceeding the normative range:

If the operating income margin value is lower than desirable it is reasonable to seek for the ways of operating expenses optimization. This can be done through decreasing the marketing expenses, management expenses, operational process expenses, etc. For instance, this can be reached through the implementation of software, which would allow to automatize some processes and release some labor resources; optimization of the office supplies expenses; decreasing the marketing communications expenses, etc.

Formula(s):

Operating Income Margin = (Net Sales – Costs of Goods Sold – Operating Expenses) ÷ Net Sales

Operating Income Margin = Operating Income ÷ Net Sales

Example:

Operating Income Margin (Year 1) = 284 ÷ 3351= 0,08

Operating Income Margin (Year 2) = 746 ÷ 3854 = 0,19

Operating income margin was 0,08 in year 1, meaning that the company was earning $0,08 of the operating income per $1 of sales. In year 2 it increased to 0,19, indicating that company’s operating income earning ability has increased to $0,19 per $1 of sales.

Conclusion:

Operating income margin is a measurement of firm's profitability, reflecting the percent of company's revenue left after excluding costs of goods sold and operating expenses. It also reflects the efficiency of the decision-making of company's management. Since the ratio is easily affected by such factors, as cost of labor or cost of raw materials, it's a concern of the company's management to keep these costs on reasonable level, and thus to avoid the operating income margin decline.