Operating Profit Margin – Formula and Understanding

Operating profit margin refers to the value earned as a percentage of net sales. The operating profit is often referred to as earnings before interest, taxes, depreciation and amortization, (EBITDA). This is a misleading reference as operating profit is actually defined differently by industry sector. EBITDA is used primarily in valuing businesses. But in general, operating profit and EBITDA have a high correlation and are considered one and the same. The goal of understanding operating profit margin is its use in evaluating business performance. This is where it becomes handy in actually understanding how this value is used to compare investments. There are drawbacks and if the user isn’t careful, it will cost him/her lots of money.

This article explains the fundamentals of operating profit margin and how the value is derived. In addition, operating profit margin is explained as to its proper use with comparing financial performance between two or more entities and why the value has inherent disadvantages. Finally,

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