Select the correct formula to calculate the operating margin ratio.

Select the correct formula to calculate the operating margin ratio.

• A. Operating Margin Ratio = EBIT / Revenue
• B. Operating Margin Ratio = Net Income / Total Assets
• C. Operating Margin Ratio = Gross Profit / Revenue
• D. Operating Margin Ratio = Total Revenue / Expenses

Answer: (A)

The operating margin ratio is designed to measure a company's operational efficiency and profitability in relation to its total revenue. By using EBIT (Earnings Before Interest and Taxes) as the numerator, the operating margin ratio provides insight into how much profit a company makes from its operations before accounting for interest and tax expenses. This focus on operational performance is vital for assessing a company’s core business profitability. Using revenue as the denominator allows this ratio to present EBIT as a percentage of total sales, giving stakeholders a clear view of operational effectiveness. A higher operating margin indicates a more profitable company, showcasing its ability to control costs and generate earnings from its operational activities. The other options do not accurately describe the operating margin ratio as they either relate to different aspects of financial performance or utilize different components that are not part of the operational efficiency measurement. For example, net income relative to total assets pertains to return on assets, while gross profit over revenue focuses on the cost of goods sold rather than operating expenses.

The operating margin ratio is designed to measure a company's operational efficiency and profitability in relation to its total revenue. By using EBIT (Earnings Before Interest and Taxes) as the numerator, the operating margin ratio provides insight into how much profit a company makes from its operations before accounting for interest and tax expenses. This focus on operational performance is vital for assessing a company’s core business profitability.

Using revenue as the denominator allows this ratio to present EBIT as a percentage of total sales, giving stakeholders a clear view of operational effectiveness. A higher operating margin indicates a more profitable company, showcasing its ability to control costs and generate earnings from its operational activities.

The other options do not accurately describe the operating margin ratio as they either relate to different aspects of financial performance or utilize different components that are not part of the operational efficiency measurement. For example, net income relative to total assets pertains to return on assets, while gross profit over revenue focuses on the cost of goods sold rather than operating expenses.