Operating Profit Margin is defined as operating profit divided by the revenue of the company for the most recent reported financial year. Operating profit indicates the amount of revenue left over after paying for operating costs of the company like cost of goods sold, salaries, selling and distribution expenses etc.
The ratio indicates the number of units of operating profit earned for every 100 units of revenue. For example if the operating profit margin is 21%, it means that for every Rs.100 revenue, Rs.21 was converted into operating profit. The ratio allows us to understand how strong the operations of the company are and how much money is leftover to pay interest costs. Obviously higher the operating profit margin the better.
For the purpose of analysis, one should compare the current year operating profit with historical numbers to understand whether the company continues to operate efficiently. Operating profit margin of 2 or more companies, functioning in the same sector, can also be compared with each other to select the more efficient one.