Operating Profit Margin (OPM) provides a measure of the profitability of a business based on its primary activities, such as selling Chai.
Calculating OPM is simpler than it may seem. Let's break it down into steps using an example:
Suppose a Chai seller sells 50 cups of Chai each day, priced at ₹10 per cup. The total revenue from Chai sales amounts to ₹500 (50 x 10). However, the seller incurs costs for purchasing ingredients, which total ₹300 per day.
To calculate the Operating profit, we subtract the cost of ingredients from the revenue:
Operating profit = Revenue - Cost of ingredients
= ₹500 - ₹300
= ₹200
The Operating Profit Margin is determined by dividing the Operating profit by the Revenue and multiplying by 100:
Operating Profit Margin = (Operating Profit / Revenue) * 100
= (200 / 500) * 100
= 40%
Why is this percentage important? A 40% OPM indicates that if the Chai seller earns ₹100 from Chai sales, ₹40 of that amount is profit from their primary Chai business. This means that ₹40 can be retained as profit after covering all costs associated with Chai sales, without considering additional factors such as loans or investments.
By analyzing the OPM, we gain insight into how well a business is performing.
