What do operating margins indicate about a company?

Operating margins provide insight into how efficiently a company is able to convert its revenue into profit from its core business operations. Specifically, it measures the percentage of revenue that remains after covering operating expenses, which include costs such as wages, rent, and raw materials. This metric is crucial because it highlights the profitability of the company’s operational activities without being influenced by non-operating income or expenses, such as taxes or interest payments.

A higher operating margin suggests that a company is capable of controlling its costs effectively relative to its revenue, indicating robust operational efficiency. In contrast, lower margins may be a sign of challenges in managing operating expenses or increasing competition. Therefore, understanding the operating margin allows stakeholders to assess the company's operational health and its ability to generate profit from its main business activities.