Strategic Case Analysis
170
Operating Margin
Also known as Operating Profit Margin or Return on Sales.
Calculated as ratio of operating income or EBIT (Earnings
before Interest and Taxes) divided by Total Revenue.
Operating Margin = EBIT ÷ Total Revenue
Operating profit margin indicates profitability from current
operations without regard to taxes and to interest charges
accruing from the debt component of the capital structure.
Net Margin
Also known as Net Profit Margin or Net Return on Sales.
Calculated as ratio of Net Income divided by Total Revenue.
Net Income and Total Revenue can be found by looking at
any company's income statement.
Net Margin = Net Income ÷ Total Revenue
Net profit margin measures net profit per sales dollar. For an
application of operating, net, and gross margins to evaluate a
company's business performance, please review the HP Case
in the chapter on Solved Cases. This case illustrates that even
though HP's gross margins are higher than Dell's, Dell is
operationally more efficient, and more profitable as a
company; since its net and operating margins are higher than
HP's.
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