Profitability Ratios _ Boundless Finance.pdf - Boundless...

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Unformatted text preview: Boundless Finance Analyzing Financial Statements Profitability Ratios Transcrip Ad ₱650/ Experience Ad Transcriptio Open Operating Margin The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue. LEARNING OBJECTIVES Calculate a company’s operating margin KEY TAKEAWAYS Key Points The operating margin equals operating income divided by revenue. The operating margin shows how much profit a company makes for each dollar in revenue. Since revenues and expenses are considered ‘operating’ in most com- panies, this is a good way to measure a company’s profitability. Although It is a good starting point for analyzing many companies, there are items like interest and taxes that are not included in operating income. Therefore, the operating margin is an imperfect measurement a company’s profitability. Key Terms operating income: Revenue – operating expenses. (Does not include other expenses such as taxes and depreciation). Operating Margin The financial job of a company is to earn a profit, which is different than earning revenue. If a company doesn’t earn a profit, their revenues aren’t helping the company grow. It is not only important to see how much a company has sold, it is important to see how much a company is making. The operating margin (also called the operating profit margin or return on sales ) is a ratio that shines a light on how much money a company is actually making in profit. It is found by dividing operating income by revenue, where operating income is revenue minus operating expenses. The higher the ratio is, the more profitable the company is from its operations. For example, an operating margin of 0.5 means that for every dollar the company takes in revenue, it earns $0.50 Operating margin formula: The operating margin is found by dividing net operating income by total revenue. in profit. A company that is not making any money will have an operating margin of 0: it is selling its products or services, but isn’t earning any profit from those sales. ...
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