Operating Margin vs Net Margin — Why Use Both?
Operating margin measures profitability from core operations, excluding the effect of how the business is financed (interest expense) and where it is domiciled (taxes). This makes it the best metric for comparing operational efficiency across companies with different capital structures.
Net margin adds back the effect of financing and tax decisions. A company with high debt will show a lower net margin than operating margin. Analysing both tells you whether underperformance is operational or financial — two very different problems with different solutions.
EBIT vs EBITDA vs Operating Income
Operating income, EBIT (Earnings Before Interest and Taxes), and EBITDA are all measures of operating profitability, but at different levels of depreciation treatment. Operating income = EBIT when there are no non-operating items. EBITDA adds back depreciation and amortisation — useful for capital-intensive businesses where D&A is large relative to cash earnings.
Operating Leverage and Margin Expansion
As revenue grows, operating margin typically expands because fixed costs (salaries, rent, infrastructure) are spread over a larger revenue base. This is operating leverage — the reason SaaS companies with 70%+ gross margins can reach 30%+ operating margins as they scale.
A company with 70% gross margin and $10M in fixed OpEx breaks even at ~$14M revenue. At $30M revenue, operating margin is ~37%. At $100M revenue, operating margin is ~60% (assuming some OpEx growth). This is why SaaS businesses are so valuable at scale.
20–30%
Target operating margin for mature SaaS
−20%
Typical operating margin for growth-stage SaaS
70%+
Gross margin needed for operating leverage
$1
Extra revenue above breakeven = ~70¢ operating income (70% GM)