Identifying a good operating margin is highly sector-dependent. The capital structures, levels of competition and scale efficiencies are different from industry to industry. It is not particularly useful to compare the operating margin of a car parts manufacturer to a clothing retailer. Higher operating margins are generally better than lower operating margins, so it might be fair to state that the only good operating margin is one that is positive and increasing over time.
Operating margin is widely considered to be one of the most important accounting measurements of operational efficiency. It measures an organization's operating income, which is total revenue over an accounting period minus operating expenses, and divided by net sales. This ratio shows how much profit is earned for each dollar of sales. For example, an operating margin of 8% means that each dollar earned in revenue brings 8 cents in profit.
Whether or not that 8-cent figure is a good operating margin is mostly relative. Healthy companies make enough in profit to cover their fixed payments, expand operations and pay out dividends. However, investors are looking for companies that perform better than their competitors and have staying power. Volume is also critical; a company that sells 100 units a year probably needs a much larger operating margin than a company that sells 10,000 units a year.
Since the particular economics of each industry is different, comparing operating margins should only be done between competitors. The margin for each company should also be reviewed over time to understand longer-term trends in business management. The best uses of the operating margin, at least for investors, center around competitive and historical context.
FAQs
A general rule of thumb is that a good operating profit margin sits between 10–20%, meaning the business has a profit of 20 cents on each dollar of revenue after operating costs have been deducted. However, this can vary from industry to industry.
Is 20% operating margin good? ›
You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.
What is a good operating margin for a small business? ›
For most businesses, an operating margin higher than 15% is considered good. It also helps to look at trends in operating margin to see if past years indicate that operating margin is going up or down.
What does 30% operating margin mean? ›
Expressed as a percentage, the operating margin shows how much earnings from operations is generated from every $1 in sales after accounting for the direct costs involved in earning those revenues. Larger margins mean that more of every dollar in sales is kept as profit.
Is 30% profit margin good? ›
In most industries, 30% is a very high net profit margin. Companies with a profit margin of 20% generally show strong financial health. If this metric drops to around 5% or lower, most businesses will need to make changes to remain sustainable.
What is a profitable operating margin? ›
Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit a company produces from its operations before subtracting taxes and interest charges. It is calculated by dividing the operating profit by total revenue and expressing it as a percentage.
Is 40 operating margin good? ›
The 40% rule is a widely used benchmark for assessing a startup's financial health and the balance between growth and profitability. This rule of thumb emphasizes that a company's growth rate and profit, typically represented by the operating profit margin, should collectively reach 40%.
What is a good annual revenue for a small business? ›
In general, the average revenue is around $44,000 per year for a company with a single owner/employee. Two-thirds of these small businesses make less than $25,000 per year. Most of these businesses are based out of the home.
What is the ideal operating ratio? ›
Good operating expense ratios range between 60% and 80%. The lower the operating expense ratio, the better an investment it is.
What is a good net profit for a small business? ›
Net profit margins vary by industry but according to the Corporate Finance Institute, 20% is considered good, 10% average or standard, and 5% is considered low or poor. Good profit margins allow companies to cover their costs and generate a return on their investment.
A general rule of thumb is that a good operating profit margin sits between 10–20%, meaning the business has a profit of 20 cents on each dollar of revenue after operating costs have been deducted. However, this can vary from industry to industry.
Can operating margin be over 100%? ›
Margins can never be more than 100 percent, but markups can be 200 percent, 500 percent, or 10,000 percent, depending on the price and the total cost of the offer.
What is a normal operating margin ratio? ›
Generally, a 10% operating profit margin is considered an average performance, and a 20% margin is excellent. It's also important to pay attention to the level of interest payments from a company's debt.
What is the rule of thumb for profit margin? ›
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
Is a 50% profit margin too much? ›
What is a good gross profit margin ratio? On the face of it, a gross profit margin ratio of 50 to 70% would be considered healthy, and it would be for many types of businesses, like retailers, restaurants, manufacturers and other producers of goods.
What small business has the highest profit margin? ›
Most profitable small businesses
- Food trucks. ...
- Car wash services. ...
- Auto repair. ...
- Personal trainers. ...
- Newborn and post-pregnancy services. ...
- Enrichment activities for children. ...
- Mobile apps and entertainment for children. ...
- Shared accessories and attire.
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
What does 20 margin mean? ›
A profit margin of 20% indicates a company is profitable, while a margin of 10% is said to be average.
What does a 20 profit margin mean? ›
The profit margin is a financial ratio used to determine the percentage of sales that a business retains as earnings after expenses have been deducted. For example, a 20% profit margin indicates that a business retains $0.20 from each dollar of sales that it makes.
Is 10% operating margin good? ›
A general rule of thumb is that a good operating profit margin sits between 10–20%, meaning the business has a profit of 20 cents on each dollar of revenue after operating costs have been deducted. However, this can vary from industry to industry.
