Operating margin vs net margin
Operating margin is EBIT over sales. On $100,000,000 of EBIT and $500,000,000 of sales it is 20 percent. Net margin is net income over sales. On the DuPont sheet, $45,000 over $500,000 is 9 percent. Those are different firms.
| Operating margin | Net profit margin | |
|---|---|---|
| Formula | EBIT / sales. | Net income / sales. |
| Teaching sheet | $100,000,000 of EBIT on $500,000,000 of sales is 20 percent. | $45,000 of net income on $500,000 of DuPont sales is 9 percent. |
| Where it stops | After operating costs, including D&A. The coupon has not come out. | After interest and tax. It is the residual share. |
| Same EBIT, larger sales | Hold EBIT at $100,000,000, raise sales to $1,000,000,000: operating margin falls to 10 percent. | The DuPont residual stays $45,000 on $500,000. Do not paste it onto the billion-dollar sales line. |
| What it is not | Net margin. A heavier coupon lowers the residual and leaves this 20 percent still. | Operating margin. Pasting $45,000 onto $500,000,000 of sales mixes two firms. |
On this page
EBIT over sales is not the residual
Operating margin asks what share of sales survived as operating profit, before interest and tax:
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, a 24 percent EBITDA margin on the cousin page.
Net margin is a later line on a different firm. On the first DuPont sheet, $45,000 of net income over $500,000 of sales is 9 percent. That $500,000 is five hundred thousand, not this page's $500,000,000. Do not paste the $45,000 residual onto the EBIT pile.
How operating margin works owns the 20 percent. How net profit margin works owns the 9 percent. How gross margin works stops at cost of goods, above both lines.
Two ways to print 10 percent operating margin
Keep EBIT at $100,000,000 and raise sales to $1,000,000,000. Operating margin is 10 percent. Profit did not fall. The top line doubled.
Cut EBIT to $50,000,000 on the original $500,000,000 of sales. Operating margin is 10 percent again. Same rate, thinner profit. EBITDA is $70,000,000, a 14 percent add-back margin, which does not match the second sheet's 12 percent.
The DuPont 9 percent is still $45,000 over $500,000 on that other firm. Gross margin against net margin is another pair that already keeps those sheets apart. This is educational material, not financial advice.
Worked examples
20 percent on the teaching sheet
EBIT is $100,000,000, D&A is $20,000,000, and sales are $500,000,000. What is operating margin?
- Operating margin: , which is 20 percent.
- EBITDA is EBIT plus D&A: , so $120,000,000.
- EBITDA margin is 24 percent. This page owns the 20 percent operating line.
Operating margin is 20 percent. EBITDA is $120,000,000. EBITDA margin is 24 percent.
The same EBIT on \$1,000,000,000 of sales
Keep EBIT at $100,000,000 and D&A at $20,000,000. Sales are now $1,000,000,000. What is operating margin?
- Operating margin: , which is 10 percent.
- EBITDA is still $120,000,000.
- EBITDA margin is 12 percent.
Operating margin is 10 percent. EBITDA is $120,000,000. EBITDA margin is 12 percent.
10 percent on \$50,000,000 of EBIT
EBIT is $50,000,000, D&A is $20,000,000, sales $500,000,000. What is operating margin?
- Operating margin: , which is 10 percent.
- EBITDA: , so $70,000,000.
- EBITDA margin is 14 percent.
Operating margin is 10 percent. EBITDA is $70,000,000. EBITDA margin is 14 percent.
9 percent on the DuPont sheet
Net income is $45,000, sales are $500,000, assets are $800,000, and equity is $300,000. What is net margin?
- Net margin is net income over sales: , which is 9 percent.
- This is a different firm from the $100,000,000 EBIT sheet. The sales line here is $500,000, not $500,000,000.
Net margin is 9 percent on $45,000 over $500,000. It is not the 20 percent operating margin, and it is not that EBIT pile.
Common questions
Why is this not net margin?
Net margin is after interest and tax. Operating margin stops at EBIT. A heavier coupon lowers net margin and leaves this 20 percent still.
Are these the same company?
No. The 20 percent is $100,000,000 of EBIT on $500,000,000 of sales. The 9 percent is $45,000 of net income on $500,000 of DuPont sales. This page puts the formulas side by side so the lines are not mashed.
Is 20 percent a target?
It is a teaching-sheet reading. The second sheet prints 10 percent because sales doubled against the same EBIT. That is a different mix, not a failed year.
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.