Operating Margin
Definition
Operating margin is operating income (EBIT) divided by revenue. It captures profitability after both direct costs (COGS) and operating expenses (SG&A, R&D, D&A), but before interest and taxes.
It reflects the full operating cost structure, including overhead and operating leverage: businesses with high fixed costs see operating margin expand quickly as revenue grows and compress quickly when it falls.
A related measure, EBITDA margin, strips out D&A and is common in comps and leveraged finance. Comparing gross margin to operating margin shows how much a company spends on overhead relative to peers.
Why interviewers ask
Interviewers use margin walk questions ("revenue grows 10% — what happens to operating margin?") to test understanding of fixed versus variable costs and operating leverage. The trap is answering without asking about cost structure — the answer depends on how much of the cost base is fixed.
Related terms
Interviews don't test definitions — they test recall under pressure.
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