What it is
Operating income (EBIT) divided by revenue. Microsoft at 42% operating margin earns 42 cents of operating profit per dollar of revenue. Amazon retail at 4% earns 4 cents.Why it's the better profitability number
Gross margin tells you about pricing power. Operating margin tells you about pricing power AND operational discipline. A company with a 60% gross margin but a 5% operating margin is bleeding money on overhead, marketing, or R&D - the topline is healthy but the underlying business isn't.What "good" looks like
- 30%+: software, exchanges, top-tier brands
- 15–25%: high-quality industrials, healthcare, premium consumer
- 5–15%: most retail, mid-tier industrials
- < 5% or negative: commodities, low-margin businesses, growth-stage tech