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Operating margin calculator

Operating margin is EBIT divided by sales. On $100,000,000 of EBIT and $500,000,000 of sales it is 20 percent. Add $20,000,000 of D&A and EBITDA is $120,000,000, a 24 percent EBITDA margin. Net margin is a different, later line.

Operating margin

20.00%

EBITDA margin 24.00% on $120,000,000 of EBITDA.

EBIT
$100,000,000
D&A
$20,000,000
EBITDA
$120,000,000
Sales
$500,000,000
Operating margin
20.00%
EBITDA margin
24.00%
$

Figures on this page are in millions of dollars. Operating profit before interest and tax.

$

Added to EBIT to reach EBITDA. Not a cash line.

$

Revenue for the same period as EBIT.

On this page

The formula

Operating margin=EBITSalesEBITDA margin=EBIT+DASales\text{Operating margin} = \frac{\text{EBIT}}{\text{Sales}} \qquad \text{EBITDA margin} = \frac{\text{EBIT}+\text{DA}}{\text{Sales}}

EBIT is operating profit before interest and tax. D&A is added to reach EBITDA. Both ratios are percentage points.

EBIT over sales, then EBITDA over the same sales

Operating margin asks what share of sales survived as operating profit before interest:

Operating margin=EBITSales\text{Operating margin} = \frac{\text{EBIT}}{\text{Sales}}

On $100,000,000 of EBIT against $500,000,000 of sales that is 20 percent. Add $20,000,000 of D&A and EBITDA is $120,000,000. EBITDA margin is 24 percent.

Those EBIT and D&A dollars are the same pair the free cash flow teaching bridge uses. The $500,000,000 of sales is new on this page. It is not the DuPont sales line.

The calculator on this page prints both margins. How operating margin works owns the 20 percent. How EBITDA margin works owns the 24 percent.

The same EBIT on a larger sales line

Keep EBIT at $100,000,000 and D&A at $20,000,000. Raise sales to $1,000,000,000. Operating margin falls to 10 percent. EBITDA margin falls to 12 percent. Profit did not fall. The top line doubled.

Halve EBIT, keep sales

Back to $500,000,000 of sales. Cut EBIT to $50,000,000. Operating margin is 10 percent. EBITDA is $70,000,000. EBITDA margin is 14 percent.

A 10 percent operating margin can be a fatter sales line or a thinner EBIT. Operating margin against net margin is a different firm: the DuPont 9 percent residual lives on a much smaller sales line, not this sheet.

What this page is not doing

It is not net margin, not gross margin, and not free cash flow. The three sheets are 20 percent and 24 percent on $500,000,000 of sales, 10 percent and 12 percent on $1,000,000,000 of sales, and 10 percent and 14 percent when EBIT is $50,000,000. This is educational material, not financial advice.

Worked examples

20 percent operating, 24 percent EBITDA

EBIT is $100,000,000, D&A is $20,000,000, sales are $500,000,000. What are the two margins?

  1. Operating margin: 100000000/500000000=0.20100000000 / 500000000 = 0.20, which is 20 percent.
  2. EBITDA: 100000000+20000000=120000000100000000 + 20000000 = 120000000, so $120,000,000.
  3. EBITDA margin: 120000000/500000000=0.24120000000 / 500000000 = 0.24, which is 24 percent.

Operating margin is 20 percent. EBITDA is $120,000,000. EBITDA margin is 24 percent.

The same profit on a billion of sales

Keep EBIT at $100,000,000 and D&A at $20,000,000. Sales are $1,000,000,000. What are the margins?

  1. Operating margin: 100000000/1000000000=0.10100000000 / 1000000000 = 0.10, 10 percent.
  2. EBITDA is still $120,000,000.
  3. EBITDA margin: 120000000/1000000000=0.12120000000 / 1000000000 = 0.12, 12 percent.

Operating margin is 10 percent. EBITDA margin is 12 percent. EBITDA is still $120,000,000.

Half the EBIT on the first sales line

EBIT is $50,000,000, D&A $20,000,000, sales $500,000,000. What are the margins?

  1. Operating margin: 50000000/500000000=0.1050000000 / 500000000 = 0.10, 10 percent.
  2. EBITDA: 50000000+20000000=7000000050000000 + 20000000 = 70000000, so $70,000,000.
  3. EBITDA margin: 70000000/500000000=0.1470000000 / 500000000 = 0.14, 14 percent.

Operating margin is 10 percent. EBITDA is $70,000,000. EBITDA margin is 14 percent.

The mistake that costs the most

Pasting a 20 percent operating margin onto the DuPont 9 percent net margin as if they were one firm.

The DuPont residual is a different sales line. This page's sales are $500,000,000. The 20 percent here is EBIT over that sales figure, not net income over DuPont sales.

The other error is calling EBITDA margin a cash margin. EBITDA has not paid tax, capex, or working capital.

Common questions

Is this gross margin?

No. Gross margin stops at cost of goods. Operating margin is after operating expenses, before interest. How gross margin works is the 35 percent wholesale sheet, another different firm.

Why add D&A back?

Because EBITDA is defined as EBIT plus D&A. The add-back is the definition, not a claim that D&A is free.

Is 20 percent a good operating margin?

It is $100,000,000 over $500,000,000 on this sheet. This is educational material, not financial advice.

Keep reading

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.