Let's take a look at 'Operating profit margin', which can be called the heart of a company.

What is operating profit margin?

Operating profit margin is a key indicator for evaluating a company's profitability , which represents the ratio of operating profit to sales. In other words, it is the value obtained by dividing the net profit excluding all expenses incurred in operating activities by sales.

This is a very useful indicator for measuring a company's business performance and is mainly used by investors and financial institutions when evaluating a company's financial status. A higher operating profit margin means that the company's profitability is good, indicating that the company has strong competitiveness and growth potential.

Generally, operating profit margins vary by industry. In manufacturing or distribution industries, some companies record high operating profit margins of over 10%, but in service or financial industries, they often show relatively low operating profit margins. It can also fluctuate depending on economic fluctuations, competitive conditions, etc., and can be improved through efforts such as corporate restructuring or cost reduction.

How to calculate operating profit margin

Operating profit margin can be calculated using the following formula.

• Operating profit margin = (Operating profit / Sales) x 100

Here, operating profit refers to the amount obtained by subtracting the cost of goods sold, selling expenses, and administrative expenses from sales.

For example, if a company's sales are 100 billion won and operating profit is 20 billion won, the company's operating profit margin is 20%.

Also, if sales are the same but operating profit increases to 30 billion won, the operating profit margin will increase to 30%. Since operating profit margin indicates the final profit obtained as a result of a company's activities, it is significant in its meaning.

Importance and usage of operating profit margin

Operating profit margin is one of the key indicators for evaluating a company's profitability. Investors use it to judge a company's financial status and business performance, and banks also use it as reference material when reviewing loans.

• The higher it is, the stronger the company's competitiveness. This means that the company has high technical skills or brand value, so it can charge higher prices from customers or produce products at lower costs.
• It is useful for understanding stability. Even if sales fluctuate due to economic fluctuations, if the operating profit margin remains at a certain level, it means that the company has a stable profit structure.
• It is used to predict the future. It can also be used to predict future conditions or set targets by analyzing past trends in operating profit margins. It can also be compared to the industry average to understand the company's relative position.

The weight of operating profit margin in analyzing corporate profitability

In financial statements, indicators that indicate a company's profitability include operating profit, gross profit, profit before income tax, and net income. However, among these, operating profit margin is considered the most important indicator for the following reasons.

• It shows pure business performance. Gross profit is the value obtained by subtracting manufacturing costs such as raw material costs from sales, and does not consider selling and administrative expenses, so it does not properly reflect the actual performance of business activities. On the other hand, operating profit shows the company's actual business performance by subtracting selling and administrative expenses such as personnel costs, advertising costs, and rent from gross profit.
• It is an indicator that can gauge the sustainability of the company. Operating profit indicates how well the company is doing in its core business, and since it is the profit before deducting interest expenses and corporate taxes, it plays an important role in evaluating the company's financial soundness and survival possibility.
• From a shareholder's perspective, it can be considered the most important indicator. Net income is the value obtained by subtracting non-operating income and corporate tax from operating profit, and represents the distributable profit for shareholders, but since it is affected by factors unrelated to the main business, it is more appropriate to use the operating profit margin to judge the company's long-term profitability and growth potential.

Comparative analysis of operating profit margin by industry

Operating profit margins vary widely by industry. According to the '2021 Corporate Management Analysis' data released by the Bank of Korea, the average operating profit margin of 741,408 non-financial profit-making corporations in Korea last year was 6.6%.

The manufacturing industry was 9.0%, up 0.5 percentage points from the previous year. This was due to the improvement in operating profit margins of major industries such as electronics, video, and telecommunications equipment (13.2%) and oil refining (22.8%) due to strong semiconductor exports.

On the other hand, the service industry fell to 4.8%, down 0.7 percentage points from a year ago. This is because operating profit margins were low in sectors such as accommodation and food service (-26.9%) and arts, sports, and leisure (-10.2%) that were directly hit by COVID-19.

The construction industry also saw its operating profit margin decline from 5.2% to 4.4% due to rising raw material prices.

As such, even within the same industry group, operating profit margins can vary depending on the specific industry, so it is necessary to consider the characteristics of each industry when evaluating a company's profitability.

Conclusion

Today, we have learned about operating profit margin, an indicator for evaluating a company's profitability.