What is an operating margin?

Operating margin is the ratio of a company's operating income for a given period expressed as a percent of its revenue. For example, if a company earns $40,000 in operating income on $200,000 in revenue, its operating margin is $40,000 divided by $200,000, or 20 percent.

Operating income is the amount of money a company has left from its revenue after removing variable costs and overhead costs. A high operating margin means the company efficiently converts revenue into operating income. An operating margin that exceeds the industry norm or one that increases over time for the company is a positive sign.