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Operating income margin definition

Description

Operating income margin is a ratio commonly used to evaluate company's operating performance. This ratio is one of the most popular profitability ratios which show operating efficiency. Data to calculate this ratio is collected from the income statement. Operating income margin shows to the managers how much a company makes from each dollar of sales ratio.

This is the reason why this ratio is also called return on sales ratio (ROS). Operating income margin ratio is important for those who are interested in company’s operating efficiency. We would recommend observing company’s operating margin ratio trends both in short and long-term.

Norms and limitations

Every industry has its own norms for this ratio.

An increasing value of operating margin indicates better performance of the company. Once the value starts decreasing, it indicates possible financial problems.

Formula

Earnings before interest and taxes (EBIT) equal net income plus interest expense plus taxes.

Net sales (revenues, sales) can be briefly described as sales, deducting returns and discount for customers.