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Online Tutorial #3: How Do You Calculate A Company's Operating Profit Margin?
Let's break down operating profit margin into its component parts:
Profit. We are calculating profit, or what's left over after subtracting expenses from
sales.
More specifically, operating profit margin equals the percentage of sales left after
subtracting the following:
• Interest payments
• Taxes
Operating profit margin is equal to EBITA (earnings before interest, taxes, and
amortization) margin.
Returning to our Domino's case study, we can calculate operating profit margin with
public financial statements:
1. Annual SEC 10-K filings. You can access Domino's income statement from its 2019
filings by clicking here. Looking at this page, the information we need comes from
this portion of the income statement:
We can estimate a company's future operating profit margin using one of four
methods:
2. Value Line. Value Line's company-specific Investment Surveys offer data points
that we can use to infer EBITA margins (%) in the past and future. We find Value
Line's projections to be a reasonable place to start your margin analysis. Note that
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Value Line's operating margin adds back depreciation, so you need to adjust down the
margin to reflect Online Tutorials and Other Resources
their approach.
3. Wall Street reports. Analysts in the investment community write detailed reports,
often accompanied by lots of historical and projected financial information. If you can
obtain these reports, they may be helpful in estimating price-implied expectations.