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Saturday, July 4, 2009

Calculating Operating Margin

From The Hoss's Mouth

Operating Margin

Money Magazine Hoss occasional will wager a dollar or two on the ponies (regular readers of the blog are well aware of this). Before investing a wager on a horse, he likes to measure the efficiency of each horse in the race using several different handicapping tools. For example, he will divide a horse's total wins by total races to obtain the horses win percentage and compare that figure to the other horses in the race. Wise investors also use several mathematical calculations to measure a company's efficiency before buying stock.
In his last post, Money Magazine Hoss showed you how to calculate Gross Profit Margin Percentage. This week, Operating Margin or Operating Profit Margin is explained. Companies with a high operating margin usually have lower fixed costs and better gross margins than their competitors. This gives them some flexibility in determining prices, which can be an advantage during economic down turns.

Operating Profit Margin is calculated as follows:

Operating Profit Margin = operating income (divided by) total revenue.

Money Magazine Hoss will again use the 2006, 2007 and 2008 income statements of Amazon, General Motors and Google.

Amazon's Operating Margin:

2006: $389,000/$10,711,000 = 3.6%

2007: $655,000/$14,835,000 = 4.4%

2008: $842,000/$19,166,000 = 4.4%

General Motors Operating Margin:

2006: $9,277,000/$207,349,000 = 4%

2007: $-4,390,000/$181,122,000 = -2%

2008: $-21,284,000/$148,979,000 = -14%

Google Operating Margin:

2006: $3,549,996/$10,604,917 = 33%

2007: $5,084,400/$16,593,986 = 30%

2008: $6,631,969/$21,795,550 = 30%

Now, Money Magazine Hoss is not a genius, but if this was a horse race, it wouldn't take a genius to figure out Google is the best bet, Amazon is worth a look, but General Motors should be put out to pasture.

Stay on Track,

Money Magazine Hoss

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