Operating Margin
Operating margin is operating income divided by revenue. Operating income is what remains of gross profit after operating expenses such as R&D, sales and marketing, and general and administrative costs, so it reflects the overall profitability of the core business.
How to read it
A steady gross margin with a rising operating margin means expenses are growing more slowly than revenue. That is operating leverage at work.
Growth-stage companies deliberately hold operating margin down to invest in R&D and sales. What to watch is whether expenses as a share of revenue are trending lower as the company scales.
Common pitfalls
- Restructuring charges, impairments and similar items are booked in operating expenses and can make operating margin plunge in a single quarter. Strip them out when looking at the trend.
On FinDog
The quarterly financials page for each stock lists operating income by quarter. The revenue flow chart on each earnings analysis page draws R&D and SG&A as separate flows.
See it on a stock page →Related terms
- Gross MarginGross margin is (revenue minus cost of revenue) divided by revenue: how much of each dollar of sales is left after direct costs. It reflects the profitability of the product itself and the company's pricing power.
- Free Cash Flow (FCF)Free cash flow is operating cash flow minus capital expenditures. It is the cash a company is genuinely free to use: for buybacks, dividends, paying down debt or acquisitions.