The difference between profit margin and operating margin

The operating margin measures the percentage return generated by the core activities of a business, while the profit margin measures the percentage return on all of its activities. The key difference is the non-operating activities that are not included in the measurement of the operating margin; these activities typically include financing transactions, such as interest income and interest expense. They may also include the returns generated by discontinued operations.

When evaluating a business, the operating margin reveals whether the core operations are capable of generating a return, which is especially evident when tracked on a trend line. This information can also be compared to the operating margins of competitors, to see how well a business is performing within an industry without the effects of financing considerations.

The profit margin is of more use when evaluating an entity in its entirety, which includes both its operating results and financing activities. This result should also be tracked on a trend line, to evaluate performance over the long term. The profit margin tends to fluctuate more than the operating margin, since the profit margin also includes financing effects that can vary substantially as interest rates change.

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