What is operating margin on 150 profit and 1,000 revenue?
Reveal the worked answer
15%.
Use revenue as denominator.
Fundamentals · FUND-03 · Core
Margins and operating leverage
Is growth converting into profit?
What you will learn and prerequisites
- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.
Read first: Understand the business
Gross, operating and net margins describe different cost layers. A rising revenue line can coexist with weaker economics. Compare the layers to locate changes in production, pricing, overhead, financing or taxes.
Absolute profit growth does not automatically mean better profitability.
Understand the mechanism
Gross margin is gross profit divided by revenue. Operating margin includes operating expenses; net margin includes further financing and tax effects. One-time items can distort comparisons.
Operating leverage means profits can change faster than revenue when costs do not move proportionately. It works against the business in downturns too.
Walk through the process
Compare multiple periods and economically similar peers. Separate temporary mix from structural competition and sustainable efficiencies from postponed spending.
Build margin forecasts from drivers rather than extending the best historical quarter indefinitely.
Evidence and decision boundary
These are original fictional teaching figures, not a company screen. Actual analysis should use primary disclosures and distinguish management's explanation from your inference. Favorable or unfavorable evidence depends on the specific business, valuation and risk; no single ratio establishes a recommendation.
A worked example
Current Harbor revenue is 1,000, gross profit 400 and operating costs 250, giving 150 operating profit and 15% margin. Prior revenue was 900, gross profit 378 and operating costs 230, giving 148 profit and 16.44% margin.
Revenue grew 11.1% but operating profit only about 1.35%. The graph compares gross and operating margins rather than letting revenue growth hide compression.
Open the calculation without leaving this lesson
Margins and operating leverage—worked comparison
Vertical: Margin (%)
Horizontal: Prior gross / current gross / prior operating / current operating
1. Fictional example
Read the graph as a data table
| Prior gross / current gross / prior operating / current operating | Fictional example |
|---|---|
| 1 | 42 |
| 2 | 40 |
| 3 | 16.4444 |
| 4 | 15 |
What would invalidate the reading?
Higher absolute earnings can distract from margin decline. Temporary underinvestment can also make a short-term margin look better than sustainable economics.
Check your understanding
Try the question before revealing its answer. These are reading checks, not trading certification or a site completion record.
What is the critical failure to avoid?
Reveal the worked answer
Higher absolute earnings can distract from margin decline. Temporary underinvestment can also make a short-term margin look better than sustainable economics.
Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome.
Return to the question: Is growth converting into profit? State the observed facts, the assumptions and the failure condition separately.
Sources, assumptions and downloadable script
External references support definitions and conventions. Worked scenarios and prose are original. No current quotes or dealer inventory are claimed.
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