Glossary · UK
What is Operating Profit Margin?
The percentage of revenue left as profit after deducting both the direct cost of goods sold and the day-to-day running costs of the business, but before interest and tax.
Full Definition
Operating profit margin (also called EBIT margin) expresses a business's operating profit -- revenue minus cost of goods sold and operating expenses such as rent, salaries, marketing and administration, but before interest on borrowing and Corporation Tax or Income Tax -- as a percentage of revenue. It sits between gross profit margin, which only deducts the direct cost of goods sold, and net profit margin, which deducts everything including interest and tax, making operating profit margin a useful measure of how efficiently the core, day-to-day trading of a business is run, stripped of the effects of how it happens to be financed (how much debt it carries and at what interest rate) or taxed. Because operating profit margin excludes financing costs, it allows a more like-for-like comparison between two similar businesses that fund themselves differently -- for example, one business that has taken on significant borrowing to expand and another that is debt-free -- since a difference in net profit margin between the two might simply reflect their different interest costs rather than how well each business is actually run. Lenders, investors and business owners often track operating profit margin over time as an early signal of whether the underlying business is becoming more or less efficient at converting sales into profit, separately from decisions about how much debt to take on or changes in the tax rate, both of which affect net profit margin but not operating profit margin.