Operating profit (EBIT) divided by revenue — the percentage of each rupee of revenue remaining after variable costs and operating overhead, before interest and taxes.
Deeper Explanation
Operating margin is the purest measure of a business's operational economics, unaffected by its capital structure or tax strategy. A business with 25% operating margins and a competitor with 8% operating margins have fundamentally different cost structures and competitive positions — and this difference will compound over time as the high-margin business reinvests from a position of strength. Operating margin leverage — the rate at which operating margin expands as revenue grows — is what Buffett describes as the "widening moat" in financial terms: the business becomes more profitable per unit of revenue as it scales, not less.
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