Tag Operating margin

Operating Profit Margin Ratio

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Operating profit margin ratio (OPMR) is a profitability ratio. It measures how much of each sales dollar remains after all costs, after interest, tax and preferred stock dividends are deducted. In other words it measures how efficiently a business manages its operations or how efficiently the firm manages its income statement (keeping a healthy balance between sales and costs).

Operating profit margin ratio (OPMR) = Operating Profit/Sales

Example

For example, if ABC Company has operating profit of $500,000 and sales of $3,000,000 then Operating profit margin ratio (OPMR) is calculated as follows:

= 500,000/3,000,000

= 0.167 or 16.7%

Test yourself

Dillon Corporation has operating profits of $600,000 and sales of $3,500,000.

Required: Find the Operating profit margin ratio (OPMR)

Solution:

The calculation of Operating profit margin ratio (OPMR) of Dillon Corporation will be as follows: OPMR = 600,000/3,500,000 OPMR = 0.17 or 17%

The higher the Operating profit margin ratio (OPMR) the better it is for the business.

 

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How to calculate EBIT (Operating Profit)?

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In summary, to calculate EBIT, we need to subtract the costs of goods sold and operating expenses from sales revenue.

To determine EBIT (operating profit), we firstly need to understand the format of the income statement.

Income Statement Format

Sales revenue

LESS: Cost of goods sold

= Gross profit

LESS: Operating expenses

= EBIT (earnings before interest and tax/operating profit)

LESS: Interest

= Net profit before tax

LESS: Taxes

= Net profit after tax

LESS: Preferred stock dividends

= Earnings available for common stockholders

Therefore, to determine EBIT, all we need to do is to subtract the cost of goods sold and operating expenses from sales revenue.

Other uses for EBIT

1 – Calculate the Operating Profit Margin Ratio = Operating profit (EBIT) / Sales The operating profit margin measures how much of each sales dollar remains after all costs except for interest, tax and preferred dividends are deducted. In other words it measures how efficient the business manages its operations or how efficiently the firm manages its income statement (keeping a healthy balance between sales and costs).

2 – Calculate the Times Interest Earned Ratio = EBIT/Interest

The times interest earned ratio (Interest Coverage Ratio) measures the ability of the enterprise to meet its financial obligations (interest payments on debt that come due).

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