Operating Margin

Gross margin only deducts COGS; operating margin also deducts SG&A, R&D, and D&A. A company can have a high gross margin but a low operating margin if it spends heavily on sales, marketing, or R&D. This is common in high-growth SaaS companies: gross margins of 80% but operating margins of -10% because of aggressive spending on growth.

Operating leverage refers to the degree to which a company's operating margin expands as revenue grows. Companies with high fixed costs (manufacturing, software) exhibit high operating leverage — small revenue increases produce large margin expansion. Understanding operating leverage is key to projecting future margins in financial models.

When comparing operating margins, ensure consistent treatment of items like stock-based compensation, restructuring charges, and amortization of acquired intangibles. Some analysts exclude these to calculate 'adjusted operating margin' for cleaner comparisons. In M&A, operating margin improvement through cost synergies is a primary source of deal value.