Operating margin is operating income divided by revenue: the share of each sale that's left once every operating cost has been paid. In Corporate Finance Institute's (CFI) worked example, revenue of $118.1 million and operating income of $19.1 million give an operating margin of 16.2%.
CFI says operating margin is also known as return on sales, which is a handy way to think about it. It's a profitability ratio, and it tells you how much of every sale survives the cost of running the business, before interest and tax come into it.
The operating margin formula
The formula is one line: Operating Margin = Operating Income / Revenue. Multiply by 100 if you want it as a percentage.
Operating income is revenue minus the cost of goods sold and minus operating expenses such as salaries, rent and depreciation. CFI notes that operating income is also called EBIT, and dividing EBIT by sales revenue gives you the same ratio. If you're unsure what belongs in the operating costs line, my guide to operating expenses walks through it.
CFI's worked example, line by line
Here's CFI's 2022 example laid out as an income statement. The figures are in millions of US dollars, CFI's example, as of October 2026.
| Line (CFI's example) | Millions of US dollars |
|---|---|
| Revenue | 118.1 |
| Cost of goods sold | 48.0 |
| Gross profit | 70.1 |
| Salaries and benefits | 22.7 |
| Rent and overhead | 10.1 |
| Depreciation and amortization | 18.2 |
| Operating income | 19.1 |
| Operating margin | 16.2% (19.1 divided by 118.1) |
I checked the sums, and they hold. Revenue of 118.1 minus 48.0 of cost of goods sold leaves 70.1. Take off 22.7, 10.1 and 18.2 and you're left with 19.1. Divide 19.1 by 118.1 and you get 16.2%. That's my working on CFI's own numbers.
CFI gives a second example that's easier to picture. DT Clinton Manufacturing reported $125 million of revenue and $80 million of operating expenses, leaving $45 million of operating income before tax. That's an operating margin of 36%. Put another way, for every dollar of sales, the business keeps $0.36 as operating profit.
How to calculate operating margin in five steps
- Start with revenue for the period.
- Subtract the cost of goods sold to reach gross profit.
- Subtract operating expenses: salaries, rent, overhead, depreciation and amortization.
- Divide the operating income you're left with by revenue.
- Compare the result only with similar businesses in the same industry.
The catch: operating profit isn't cash
This is the limit people miss. CFI says operating profit is an accounting measure, not an indicator of economic value or cash flow. It includes non-cash expenses such as depreciation, amortization and stock-based compensation, and it leaves out capital expenditure and changes in working capital. So the cash a business generates can be higher or lower than its operating profit.
Look at CFI's first example again. Depreciation and amortization took 18.2 off operating income, yet that's a non-cash line. Meanwhile, anything the company spent on new equipment that year doesn't appear in operating income at all. A healthy margin and a tight bank balance can sit side by side.
What a good operating margin looks like
CFI's rule is that, all other things being equal, a higher operating margin means less financial risk. But it's firm that you should only compare against similar companies in the same industry, because industries run on very different margins. A figure that looks thin in one sector can be strong in another.
The trend matters as much as the number. CFI says a rising margin over time can come from tighter control of operating costs, or from higher pricing, better marketing and increased demand. Both routes count, and the second is the one most owners overlook.
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How it sits between gross and net margin
Operating margin is the middle step. Gross margin only takes off the cost of goods sold. Net margin takes off everything, including interest and tax. CFI suggests comparing operating margin with the firm's own past margins and with its gross and net margins. If you want the other two, I've covered the difference between gross profit and net profit separately, so I won't repeat it here.
Where I come in
CFI's list of what lifts operating margin includes better marketing and increased demand. That's my side of the ledger. I work with small businesses and SaaS marketing teams on marketing that brings in more of the right customers, so revenue grows faster than the operating costs underneath it. You can see how I work on my work with me page.
My verdict on operating margin
Operating margin tells you whether the business model works before interest and tax muddy the picture. That makes it one of the most useful numbers you've got. Just don't treat it as cash in the bank. Track it every year, compare it only with businesses like yours, and when it moves, ask whether costs fell or demand rose. You'll learn more from that question than from the number itself.
Frequently asked questions
What is operating margin?
It's operating income divided by revenue. CFI says it shows how much of sales is left once all operating expenses are paid, and it's also called return on sales.
How do you calculate operating margin?
Subtract the cost of goods sold and operating expenses from revenue to get operating income, then divide operating income by revenue.
Is operating margin the same as EBIT margin?
CFI says EBIT is also called operating income, and dividing EBIT by sales revenue gives the operating margin.
Is operating profit the same as cash flow?
No. CFI says operating profit includes non-cash expenses such as depreciation and excludes capital expenditure and working capital changes, so cash flow can be higher or lower.
What is a good operating margin?
CFI says a higher margin means less financial risk, all else being equal, but you should only compare with similar companies in the same industry.
