Which statement best differentiates operating margin from net margin?

• A. Operating margin uses operating income divided by revenue; net margin uses net income after all expenses and gains.
• B. Operating margin includes non-operating items.
• C. Operating margin is calculated on assets; net margin on equity.
• D. Operating margin is after tax; net margin before tax.

Answer: (A)

The difference hinges on what income you use in the numerator. Operating margin compares operating income to revenue, showing how efficiently core operations convert sales into profit before interest and taxes. Net margin compares net income to revenue, showing overall profitability after all expenses, taxes, financing, and gains or losses have been included.

That makes the statement correct: operating margin uses operating income divided by revenue, while net margin uses net income after all expenses and gains divided by revenue. It’s also why the other ideas don’t fit: operating margin does not include non-operating items (those are excluded when using operating income), margins aren’t calculated with assets or equity in the denominator, and net margin is after tax (while operating margin is pre-tax).