What is 'operating margin'?

Operating margin is defined as a measure of the proportion of revenue that remains after covering the operating expenses associated with producing goods or services. It is calculated by dividing operating income (which is revenue minus operating expenses) by total revenue. This figure helps businesses gauge their operational efficiency, indicating how much profit is generated from each dollar of sales after all operating costs have been paid. A higher operating margin suggests a more efficient operation, as it reflects the ability to convert sales into actual profit.

Understanding operating margin is crucial for assessing a company’s financial health and performance, as it provides insight into the effectiveness of management in controlling costs while generating revenue. Other options such as sales efficiency, net income to total assets, and market share do not directly address the concept of operating expenses in relation to revenue and therefore do not accurately describe operating margin.