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Operating Profit Margin Definition

Definition

The word operating profit margin can be utilized to spell out a step which enables analysts to comprehend the speed of yield from the center business operations of a provider. This metric removes the aftereffects of non-operating income activities like the selling of resources.

Calculation

Operating Profit Margin (percent ) = ((Sales – COGS – SG&A) / Sales) X-100

Where:

  • Sales incorporate the entire revenue at the present phase.
  • The Cost of Goods Sold (COGS) comprises raw materials, direct labour and manufacturing outlay.
  • Sales, General and Administrative Expense (SG&A) comprises office equipment, rear office labour like bookkeeping, sales wages, payroll expenses, advertisements, in addition to utilities (power, waterand heating ).

Explanation

Operating performance measures permit the investor-analyst to comprehend how well an organization is performing depending on earnings, gross profits, and profits. One of those techniques to assess the efficacy of a corporation’s core business is by simply calculating their operating profit margin.

This metric determines the organization’s operating income by accepting earnings and subtracting from the SG&A and COGS. This value is then divided by earnings to derive the organization’s operating profit margin. This step makes it possible for the investor to comprehend the sustainability of a organization’s core business operations, as it excludes outstanding trades in addition to income based on the selling of resources. The step also excludes interest expenditure, hence eliminating the consequences of financing decisions.

Example

Company A’s new Chief Financial Officer might love to get a deeper comprehension of the provider’s potential to generate profits from the core business operations. She asked her analysts to supply her several metrics, like the provider’s operating profit margin. Employing the provider’s most up-to-date income statement, the analyst placed the next table together.

Sales Revenues $12,500,000
Cost of Goods Sold $6,700,000
Gross Margin $5,800,000
Selling, General & Administrative Expense $986,000
Operating Profit $4,814,000

From the aforementioned data, the analyst has been able to compute Company A’s operating profit margin because:

= Operating Profit / Sales Revenues, or
= ($4,814,000 / $12,500,000) X100, or 38.5percent