Monday, 29 July 2013

What is the operating profit margin ratio? More Ratios for Business Analysis

The operating profit margin is a type of profitability ratio known as a margin ratio. The information with which to calculate the operating profit margin comes from a company'sincome statement.

Operating Profit Margin = Operating Income/Sales Revenue = _______%

Operating income is often called earnings before income and taxes or EBIT. EBIT is the income that is left, on the income statement, after all operating costs and overhead, such as selling costs and administration expenses, along with cost of goods sold, are subtracted out.

What Does the Operating Profit Margin Tell the Business Owner?
Operating Profit Margin = EBIT/Sales Revenue = ________%
The operating profit margin gives the business owner a lot of important information about the firm's profitability, particularly with regard to cost control. It shows how much cash is thrown off after most of the expenses are met. A high operating profit margin means that the company has good cost control and/or that sales are increasing faster than costs, which is the optimal situation for the company. Operating profit will be a lot lower than the gross profit since selling, administrative, and other expenses are included along with cost of goods sold.
As the company grows and sales revenue grows, overhead, or fixed costs, should become a smaller and smaller percentage of total costs and the operating profit margin should increase. A high operating profit margin usually means that the business firm has a low-cost operating model.