It is said that high Operating Margin means that the company is efficient in its operations and is good at turning sales into profits.

But let's suppose that market demand has increased. The company did nothing, it is working the same way as earlier. But its revenue is getting higher, while operating expences are quite possible stay the same (or about the same). In this case the Operating Margin is gonna be higher despite the fact that the company's efficiency hasn't changed.

Am I right that Operating Margin is not really an indicator of company's efficiency, instead decreasing revenue makes Operating Marging lower, increasing revenue makes Operating Margin higher?


If a company sees increased demand and can handle it with existing employees, capital and expenses, then it certainly has increased its efficiency (the same resources are producing more revenue). Thus the higher operating margin correctly reflects higher efficiency.

  • Sorry, I may not be quite correct saying that operating expences stay the same - what I meant was rather (operating expences - COGS) stay the same. The company's COGS increases, but the wages, marketing stay the same. In this case Gross margin stays the same, but Operating Margin increases, right? But the company didn't improve its processes or anything else. – Daniel Feb 22 at 20:57
  • 1
    Stock analysts would still say that the company is operating more efficiently: More revenue likely means more customers. If the same sales and service teams are handling more customers, they are increasingly efficient. That goes even if their processes didn't change. Keep in mind, ratios like op. margin are typically useful within a single industry. They can't necessarily be applied across industries. When you do, the results can be interesting, but unimportant. E.g., the ratio of revenue per employee, across industries: visualcapitalist.com/companies-revenue-per-employee – Orange Coast- reinstate Monica Feb 22 at 21:21

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.