Operating income as a percentage of revenue; profitability of the core business before financing and tax decisions.
Operating margin captures both pricing and cost discipline, so it is the standard cross-company profitability measure. It is the link between gross-margin and the overhead base: margin expansion usually comes from holding operating-expenses flat while revenue grows, which is operating-leverage at work.
Because it excludes interest and tax, it is comparable across companies with different capital structures and tax domiciles, which net-margin is not.
Example: Northwind Tools earns $120M of operating income on $840M of revenue, a 14.3% operating margin, up from 12.2% two years earlier as SG&A growth lagged revenue growth.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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