What Is Operating Margin?

Operating margin is a company's operating income divided by its revenue. It shows how many cents of each sales dollar are left after paying for the product, salaries, offices, marketing and research, but before interest on debt and income tax. It is the cleanest measure of what the business itself earns, independent of how it is financed.

How it's calculated#

Operating margin = Operating income / Revenue

Operating income is revenue minus cost of sales minus operating expenses, meaning selling, general and administrative costs plus research and development. Say a company sells $500 million of services in a year, the direct cost of those services is $300 million and the cost of running the company is $150 million. That leaves $50 million of operating income and a 10% operating margin.

The same company, with a 40% gross margin, keeps only a quarter of that surplus once overhead is paid. The gap between gross margin and operating margin is one of the most revealing numbers in a filing, because it shows what it costs to keep the sales coming.

A real example#

Nvidia's fiscal 2026, which ended on January 25, 2026, produced $215.94 billion of revenue and $130.39 billion of operating income. The operating margin was 60.4%: sixty cents of every sales dollar were left after paying for the chips, the engineers and everything else. A year earlier the figure was 62.4%.

A two-point decline on revenue that grew 65% sounds like a paradox, but the mechanism is straightforward. Gross margin slipped from 75.0% to 71.1%, and operating expenses rose 41%, mostly in research and development. So the record sales year was also a year in which each dollar of revenue cost a little more to produce.

For comparison, Costco's fiscal-2025 operating margin was 3.77%, from $10.38 billion of operating income on $275.24 billion of revenue. Both numbers describe companies that work well. They differ in model: one sells a scarce product at a high markup, the other sells everyday goods at a minimal one, and membership fees cover more than half of its operating income.

How to read it#

Operating margin can be read three ways. On its own, it says whether the business makes money from operations at all. Over time, it shows whether the company is getting operating leverage: when fixed costs grow slower than sales, the margin widens year after year. Against direct competitors, it shows who has a cost advantage.

The trend through a full cycle usually says the most. A margin that expands in good years and collapses in bad ones signals heavy fixed costs. A margin that holds in both phases signals a business in control of its cost base.

Common pitfalls#

The first pitfall is one-time items. Goodwill write-downs, restructuring charges or a gain on selling a plant usually land in operating income and can move the margin by several points in a single year. Check whether the company reports them separately.

The second is confusing it with EBITDA margin. A company with a high EBITDA margin and a low operating margin owns a lot of assets that wear out, and that cost is real even if it does not require cash in a given year.

The third is the "adjusted" margin. Many companies publish their own version alongside the reported one, excluding stock-based compensation or amortization of acquired intangibles. That is not wrong, but only compare versions built the same way.

Related terms#

Gross margin sits one level up and shows the surplus on the product alone. Net profit margin sits one level down, after interest and tax. EBITDA is a related measure that leaves out depreciation, and what counts as a good EBITDA margin has its own explainer.