Operating Margin.
A definition, in plain English — with the books that teach it.
What it means
Operating margin measures the percentage of revenue a company retains as operating profit after paying for the cost of goods sold and operating expenses, but before interest and taxes. It is calculated as operating income divided by total revenue. Operating margin is a key indicator of operational efficiency and pricing power — a rising margin signals that revenue is growing faster than costs, while a falling margin may reveal cost pressure, pricing erosion, or scaling inefficiency.
Example
A software company generates $20 million in revenue. After $6 million in cost of goods sold and $8 million in operating expenses, operating income is $6 million. Operating margin = $6M / $20M = 30%. A competitor with the same revenue but $16 million in combined costs has an operating margin of only 20% — less efficient at converting revenue into profit.
