Operating and Net Profit Margin Ratio measure in percentage terms, the profit being generated for each rupee of sales which the company makes. Operating Profit Margin Ratio measures the return being generated by the business purely from its operations. It is the proportion of revenues remaining after paying for the cost of operating a business such as, labour costs (salaries & wages), raw materials, selling and administrative expenses etc. When calculating the Operating Profit Margin on a consolidated basis, the numerator is the OPERATING PROFIT generated by the company along with its subsidiaries. Accordingly, the denominator will represents the total income generated from operations by ‘all the constituents’ of the company including minorities.
A variation of the Operating Profit Margin Ratio is the Earnings before, Interest, Tax, Depreciation and Amortisation (EBITDA) Margin Ratio calculated by simply adding other income to the numerator of this ratio. Other income should be included in the numerator only if it is of a recurring nature. We exclude other income consistently in all our calculations.
The only exception to this rule is banking companies where other income forms a big part of the total revenue and is of a recurring nature. Other income for banking companies largely constitutes of fee income such as commission and brokerage fees, client based merchant foreign exchange trade, service charges from account maintenance, transaction banking (including cash management services), syndication and placement fees, processing fees from loans and commission on non funded products (such as letters of credit and bank guarantees) etc. Banks in the more developed countries earn up to 50% of their total revenue in the form of fees and commission.
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About the Author
Rajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.Follow @SanaSecurities