Operating Profit Margin: Strong Indicator of Efficiency

When you want to work out whether the company you have stocks in is working effectively, you should consider looking at the operating profit margin. This is considered to be the amount of revenue which is left over, before any kind of indirect costing such as taxes and rent, after all of the variable expenses such as wages and parts have been paid. The operating profit margin, also known as the operating margin, is a useful way of discovering if the company you have shares in is working at its maximum, or if there are problems in its running which will eventually lead to money problems.

Investors and the Operating Profit Margin

Investors may consider looking at the operating profit margin in order to work out if they have invested in the right company. In order to properly understand whether it is a useful tool for working out the margin, you will first need to do some calculations, and look at other companies which you know are doing well. This can be a useful comparison with your own shares, as it will allow you to gain a good idea of what does and does not work. A low operating margin could mean that the company is running on a very narrow margin, which is a risk when the economy is in a tight spot. Those companies with higher operating margins will probably be better able to weather out the storm of near-recession and government cuts.

Calculating the Operating Profit Margin

You should be able to locate the operating margin in the financial statement of the company. Look for the ratio analysis columns, usually highlighted on the left of statement spreadsheets. If you cannot find them on the spreadsheets, then you will need to work them out yourself by following a formula. The most common formula for working out this system is Operating Profit Margin = Net Operating Profit After Taxes/Sales. This means dividing your net profit by the amount of sales that have been made.

Working out the Margin Using the Formula

Start with a company which has a net profit of 8,000 dollars. They have made sales of 10,000. Their net profit margin would be $0.80, or 80 cents in every dollar made. This is not a bad ratio, and you should be able to work out whether this is an accurate representation of the proceeds by looking at the financial status of the company.

Another company does not do so well. They make a net profit of 7,000 after tax, but only make sales of 8900 in the year. This would give them a profit of $0.79, or 7.87 percent.

If you find that you have shares in a company with steadily dropping profit margins, then you should consider taking out your money, and placing it into a safer situation. You might also want to consider telling the company that you are concerned about their profit margin dropping, as sometimes profits can be rescued by tightening the belt of the business.

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