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9
Operating Profit Margin
Overview
Operating profit margin is a profitability ratio used to calculate the percentage of profit a company
produces from its operations, prior to subtracting taxes and interest charges. It is calculated by
dividing the operating profit by total revenue and is expressed as a percentage. The margin is also
known as the EBIT (Earnings Before Interest and Tax) margin.
Formula
Interpretation
Operating Profit margin = Net EBIT ⁄ Total revenue x 100
The operating profit margin calculation is the percentage of operating profit derived from total
revenue. For example, a 15% operating profit margin is equal to $0.15 operating profit for every $1
of revenue.
An example of how this profit metric can be used is the situation of an acquirer considering
a leveraged buyout. When the acquirer is analyzing the target company, they would be looking at
the potential improvements that they can bring into the operations. The operating profit margin
provides an insight into how well the target company performs in comparison to its peers, in
particular, how efficiently a company manages its expenses so as to maximize profitability. The
omission of interest and taxes is helpful because a leveraged buyout would inject a company with
completely new debt, which would then make historical interest expense irrelevant.
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