Definition: The Operating Profit Margin Ratio shows the proportion of revenues left after making the payment for the operations unrelated to the direct production of goods and services. It is also referred to as income from operations and shows the margin left after paying the overhead expenses, manufacturing expenses, selling and distribution expenses, administrative expenses, etc.
The operating profit margin ratio act as a key indicator for the creditors and the investors because it helps them to evaluate the effectiveness of company’s operations.The formula to compute this ratio is:
Operating Profit Margin Ratio = Operating Profit/Net Sales
Where, Operating Profit = Revenue – (Operating Expenses, Depreciation, Amortization, etc.)
The higher value of the operating profit margin ratio shows that the company is making enough profits from its operations to pay for the variable as well the fixed expenses.
Example, Suppose a firm has a net sales of Rs 4,00,000 and its cost of goods sold is Rs 2,00,000. The other expenses such as Wages, Rent and Operating expenses are Rs 50,000, Rs 10,000 and Rs 20,000 respectively. Then the operating profit margin will be:
= [4,00,000 – (2,00,000 + 50,000 + 10,000+ 20,000)] / 4,00,000
= 0.3 or 30%