Operating margin

Profitability

The share of revenue left after all costs of running the business, before interest and taxes.

Formula

Operating margin = operating income ÷ revenue

Why it matters

Operating margin measures the profitability of the business itself, separate from how it is financed or taxed. It captures whether scale is working: as revenue grows, do overhead costs grow slower (operating leverage) or keep pace? A company with high gross margin but thin operating margin is spending its pricing power on sales, marketing, or R&D — which may be fine while growing, but must eventually convert to profit.

What good looks like

Above 25% is excellent for most industries. 10–25% is solid. Below 10% leaves little cushion for a downturn or a price war. Watch the direction: a growing company whose operating margin expands each year is demonstrating operating leverage; one whose margin shrinks while revenue grows is buying growth.

Caveats

Operating income can include one-time restructuring charges, impairments, and litigation costs that obscure the underlying run rate. Stock-based compensation is an expense here, but its cash effect appears elsewhere — compare with FCF margin to see both views. Capital-intensive businesses carry heavy depreciation in operating costs, so their margins look thin even when cash generation is fine.