In business, operating margin — also known as operating income margin, operating profit
margin and return on sales — is the ratio of operating income divided by net sales,
usually presented in percent.
Net profit measures the profitability of ventures after accounting for all costs.
Return on sales is net profit as a percentage of sales revenue. ROS is an indicator of profitability
and is often used to compare the profitability of companies and industries of differing sizes.
Significantly, ROS does not account for the capital used to generate the profit. In a
survey of nearly 200 senior marketing managers, 69 percent responded that they found the "return
on sales" metric very useful. Earnings Before Interest, Taxes, Depreciation,
and Amortization is a rough measure of operating cash flow, which reduces the effect of accounting,
financing, and tax policies on reported profits.
Purpose These financial metrics measure levels and
rates of profitability. How does a company decide whether it is successful or not? Probably
the most common way is to look at the net profits of the business. Companies are collections
of projects and markets, individual areas can be judged on how successful they are at
adding to the corporate net profit. Not all projects are of equal size, however, and one
way to adjust for size is to divide the profit by sales revenue. The resulting ratio is return
on sales, the percentage of sales revenue that gets 'returned' to the company as net
profits after all the related costs of the activity are deducted.
Construction Net profit measures the fundamental profitability
of the business. It is the revenues of the activity less the costs of the activity. The
main complication is in more complex businesses when overhead needs to be allocated across
divisions of the company. . . . Almost by definition, overheads are costs that cannot
be directly tied to any specific product or division. The classic example would be the
cost of headquarters staff. Net profit: To calculate net profit for a
unit, subtract all costs, including a fair share of total corporate overheads, from the
gross revenues. Net profit = Sales revenue - Total costs
Return on sales: Net profit as a percentage of sales revenue.
Return on sales = Net profit / Sales revenue Earnings Before Interest, Taxes, Depreciation,
and Amortization is a very popular measure of financial performance. It is used to assess
the 'operating' profit of the business. It is a rough way of calculating how much cash
the business is generating and is even sometimes called the 'operating cash flow.' It can be
useful because it removes factors that change the view of performance depending upon the
accounting and financing policies of the business. Supporters argue it reduces management's ability
to change the profits they report by their choice of accounting rules and the way they
generate financial backing for the company. This metric excludes from consideration expenses
related to decisions such as how to finance the business and over what period they depreciate
fixed assets. EBITDA is typically closer to actual cash flow than is NOPAT. . . . EBITDA
can be calculated by adding back the costs of interest, depreciation, and amortization
charges and any taxes incurred. EBITDA = Net profit + Interest Payments + Taxes Incurred
+ Depreciation and Amortization Charges Example: The Coca Cola Company
(Relevant figures in italics)
It is a measurement of what proportion of a company's revenue is left over, before taxes
and other indirect costs, after paying for variable costs of production as wages, raw
materials, etc. A good operating margin is needed for a company to be able to pay for
its fixed costs, such as interest on debt. A higher operating margin means that the company
has less financial risk. Operating margin can be considered total revenue
from product sales less all costs before adjustment for taxes, dividends to shareholders, and
interest on debt. See also
Efficiency ratio Profit margin
References As of 1 May 2012, this article is derived
in whole or in part from Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David
J. Reibstein. Marketing Metrics: The Definitive Guide to Measuring Marketing Performance..
The copyright holder has licensed the content utilized under CC-By-SA and GFDL. All relevant
terms must be followed. ^ a b c d e f g h i Farris, Paul W.; Neil
T. Bendle; Phillip E. Pfeifer; David J. Reibstein. Marketing Metrics: The Definitive Guide to
Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc.
ISBN 0137058292. The Marketing Accountability Standards Board endorses the definitions,
purposes, and constructs of classes of measures that appear in Marketing Metrics as part of
its ongoing Common Language: Marketing Activities and Metrics Project.
^ The Coca Cola Company Form 10-K SEC Filing 2006, p 67