Both operating and profit margin are using to measure the efficiency of your entity. These margins is very useful to compare with previous results or to compare the profits of competitor firms in the same industry.
Difference between Profit Margin and Operating Profit are enumerated as follows:
Profit Margin can be classified as Gross profit margin and Net profit margin.
Gross profits margin are linked with gross sales revenue and cost of goods sold. The formula is Gross Profit/ Sales Revenue. This Margin is expressed as a percentage and using to judge company’s ability whether production costs are properly controlled.
Net Profit margin shows total view of financial health and this is more effective and popular term than gross profit margin. This margin consider all costs associated with the company. i.e. Cost of sales, Distribution costs, Administrative Expenses, Interest payments and taxes. Gross profit margin consider only production efficiency but net profit margin consider the all activities and indicates management where management attention is required.
Profit Margin = Net Income/ Net Sales x 100
Net Sales = Gross Sales – Sales Return, Discounts and Allowances
Net Income/Net Profit = Revenue – Cost of Sales + Other Income – Distribution Costs-Administrative Costs – Finance Costs – Tax Expenses
Operating Profit Margin:
Operating profit margin is the operating profit divided sales revenue and takes a wider look at costs than at the profit margin. This profit margin measures management efficiency and is a better reflection of the company’ overall pricing strategy.
The formula of Operating Profit margin is Operating Profit/Net sales x 100
Operating Expenses include administrative costs, distribution costs, salaries, property or building costs and depreciation. Interest Expenses and Taxes are not included in operating expenses. This margin is also expressed as a percentage and also known as EBIT (Earning before interest and tax).