Understanding Operating Margin in Stocks

Understand Operating Margins

Operating revenue determines the amount of revenue a company keeps as pure profit. This is an important metric for analyzing stocks because it shows investors the true profitability of a business and helps compare different stocks side by side.

What is Operating Margin?

Operating margin, aka operating profit margin, is a business metric that investors can use to quickly determine the percentage of revenue a company keeps after costs of goods sold and operating expenses.

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Operating margin is made up of two important numbers: operating income and total revenue. Operating income equals revenue minus the cost of goods sold and operating expenses ( includes things like

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Operating Margin Formula

Operating Margin = Operating Income / Total Revenue x 100

Comparing Stocks Using Operating Margins

To fully understand how opertion margin affects stocks, I will compare Ford and Tesla. Both of these companies operate in the automotive industry and have similar business models.

Tesla Vs Ford Operating Margins Compared

CompanyOperating Margin
Tesla16.66%
Ford6.5%

Tesla’s industry leading operating margins help the company generate more net income despite having half of Ford’s revenue.

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Tesla vs Ford NetIncome (TTM)

CompanyNet Income (TTM)
Tesla$11 billion
Ford$9 billion

Tesla will grow its net income much easier without needing to sell as many EVs. Once Tesla’s vehicle production ramps up, TSLA shareholders will benefit in the long run from Tesla’s superior operating margins.

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What Do Operating Margin Decreases Tell You

If a company experiences a decrease in operating margins then investors should find out what caused the decrease. Operations margins may decrease due to several factors such as:

  • Higher cost of good sold
  • The increased price of commodities and raw materials
  • Higher employee expenses
  • Reducing demand for a company’s products
  • Etc

If operations margins continue to decline over the long run then this is a major warning sign to investors.

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