Operating Margin

Operating margin takes gross profit and subtracts all operating expenses, sales and marketing, research and development, general and administrative costs, to show what percentage of revenue becomes operating profit. It is calculated as Operating Income / Revenue. Operating margin isolates how well a company runs its core business by excluding interest payments, taxes, and one-time items that are not part of day-to-day operations. This makes it one of the best metrics for comparing operational efficiency across companies in the same industry. A company with a 25% operating margin keeps 25 cents of every dollar of revenue as operating profit. Technology companies typically have the highest operating margins in the S&P 500 because their products scale without proportional cost increases. Retail and food service companies often have the lowest because they are labor-intensive and capital-heavy. Improving operating margins usually indicate that a company is achieving operating leverage, growing revenue faster than expenses. For operators and founders, operating margin trends at major companies signal how much room there is for budget expansion. Companies with expanding operating margins are more likely to invest in new tools, partnerships, and platforms.