GLOSSARY // Fundamentals
Operating Margin
Operating margin is operating income divided by revenue — the percentage of sales left after both cost of goods sold and operating expenses (R&D, sales and marketing, administration), but before interest and taxes. It measures how profitably the core business runs.
Sitting between gross margin and net margin, it is the layer where scale shows up. Gross margin is set by the product; operating margin is set by how much company you need to sell it. When revenue grows faster than opex, operating margin expands — the "operating leverage" story behind most great earnings runs.
Comparisons work best within a sector. A 25% operating margin is elite for a retailer and mediocre for enterprise software, so the useful questions are: how does it compare to direct peers, and which way is it trending?
A company with $200M revenue has $120M gross profit and spends $70M on operating expenses. Operating income = 120 - 70 = $50M, so operating margin = 50 / 200 = 25%. If revenue grows to $240M next year while opex only rises to $76M and gross margin holds at 60%, operating income becomes 144 - 76 = $68M — a 28.3% margin, expansion from scale alone.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.