What Is The Difference Between Operating Margin And Gross Margin?

Margins are very important parameters in determining, how well a company performs. Often, we see many kinds margins being used by analysts during the analysis of a company performance. For that matter, even bankers often use a umber of profit margin metrics, before disbursing a loan.

Two of the important parameters are operating margin and gross margin. Here we discuss the difference between operating margin and gross margin.

Operating margin tells us how a company has performed at the operating level. To begin with we have to first arrive at the operating profit, before working on the margin figure. Operating profit would be the revenues, minus all operating costs involved. For example, if a company has revenues of Rs 1 lakh and operating cots were Rs 80,000, we could say that the operating margin is 20%.

Operating margin should subtract all overhead and operational expenses from revenues. It gives you the final figure, which you arrive at, before interest and tax.

Gross profit margin would not include certain expenses like overhead and operational. This is why the gross profit margin figure could be higher then the operating profit margin figure.

Operating costs would involve so many other costs, including distribution, marketing etc. In any case both operating margin and gross margin, are important indicators of the performance of a company. Higher the margins, better is a company's operational performance.

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