Calculate Operating Margin

In the article “Calculate Profit Margin”, we showed how to calculate the profit margin from business’s financial statement. In this article, we are going to discuss the operating margin and show the equation and steps how to calculate operating margin from company’s net income statement. We are going to use net income statement from MSN Money website as an example to show the calculation
 

What is Operating Margin

Similar to Profit Margin, Operating Margin is also one of the ratios to measure business’s profitability. The only difference is that instead of using net income, operating margin uses operating income to calculate the ratio
=>Operating Margin = Operating Income / Revenue
 

Difference between Operating Income and Net Income

As the name suggested, operating income is income generated solely from operating activity. Take the net income statement of Caterpillar Inc. (CAT) downloaded by Stock Financial Statements Download (SFSD) for example. It is obvious that
Operating Income = gross profit – operating expenses
Where operating expenses = Gross profit - selling general and administrative – research and development – special income/charges – interest income/expense
As for net income, it is derived from operating income minus nonoperation expense
=> Net income = operating income – nonoperation expense
= operating income – net interest income – other income – pretax income – provision for income tax – minority interest

 


 
 

Calculate Operating Margin from Financial Statement

We are going to use income statement from company Caterpillar (CAT) to show how to calculate Caterpillar’s operating margin. You can access Caterpillar’s income statement here or you can use or product, Stock Financial Statements Download, to download and export Caterpillar’s income statement.

Calculate Profit Margin

In the article “Calculate Financial Leverage”, we showed how to calculate the financial leverage from business’s financial statement and debt equity ratio. In this article, we are going to discuss the profit margin and show the equation and steps how to calculate profit margin from company’s financial statement, basically net income statement.

What is Profit Margin

Profit Margin is one of the ratios to measure business’s profitability. The basic idea behind this measurement is to see how efficient the business generates revenue based on cost accrued. If the business can generate more revenue based on less cost, it is more efficient, and hence has higher profit margin
=> Profit Margin = (Revenue – Cost)/Revenue
Because Revenue – Cost is simply Net Income
=>Profit Margin = Net Income / Revenue

Calculate Profit Margin from Financial Statement

We are going to use income statement from company Caterpillar (CAT) to show how to calculate Caterpillar’s profit margin. You can access Caterpillar’s income statement here or you can use or product, Stock Financial Statements Download, to download and export Caterpillar’s income statement.
Following is screenshot how it looks like using Stock Financial Statements Download to export it into local PC



From its income statement, Caterpillar has total revenue $65875M and net income $5681M in 2012. Because Profit Margin = Net Income / Revenue
=> Caterpillar’s profit margin in 2012 = 5681/65875 = 8.62%

Commentary

Profit Margin is used to measure business’s profitability. Higher profit margin generally indicates the company has higher profitability. However, from investors’ point of view, high profit margin doesn’t mean it will have high return on equity, which is the major ratio investors are looking for. It is possible that a company can have high profit margin yet its return on equity is low. Besides that, profit margin may vary among different industries. However, it is still a valuable indicator because investors can calculate the profit margin year by year based on the company’s historical financial statement for internal comparison