Definition:

Operating Profit Margin is a financial metric that measures the proportion of a company's revenue that is left over after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax.

Formula:

Operating Profit Margin = (Operating Income / Revenue) * 100

How to use the metric:

This metric is used to assess a company's operational efficiency and profitability. A higher operating profit margin indicates a more efficient company in terms of controlling its costs relative to its revenue.

Limitations:

Operating Profit Margin does not account for non-operating expenses like interest and taxes, which can significantly affect a company's net profitability. It also does not consider capital structure differences between companies.

Applies to:

This metric is useful across most industries, particularly in manufacturing, retail, and services, where operational efficiency is crucial.

Doesn't apply to:

It may be less applicable to industries with significant non-operating income or expenses, such as financial services, where interest and investment income play a large role in profitability.

Summary:

Operating Profit Margin is a key indicator of a company's operational efficiency, providing insight into how well a company is managing its core business expenses relative to its revenue. However, it should be used in conjunction with other financial metrics to get a comprehensive view of a company's financial health.