Every business has its characteristic Operating Margins. Operating Margins don't expand and retract radically with passing time. Its the level below which the business doesn't wish to sell. Operating margins are calculated after taking into account fixed operating costs. It simply can't be calculated straightaway. The level is reached after a number of internal assessments. In case of brands, supposed brand value is also incorporated into the margins. A healthy Operating Margin is essential for the growth of the business.
Operating Margin can't just be increased at will as it'll result in increment of prices taking into account that fixed operating costs is constant. Increased prices of products can result in your competition eating into your market share or customers turning away from you or cutting their discretionary spending. Increased Operating Margins from increase in prices shall be viewed with caution. Operating Margins can also improve from certain structural changes in fixed operating costs. Reduction in any kind of fixed operating costs can lead to improvement of Operating Margins which must be welcome.
Deterioration in Operating Margins shall be probed vigorously by investors. Operating Margins getting deteriorated because of reduction in prices of products can indicate to the commoditisation of the industry in which the business is operating. If the reduction in margins is because of changes in strucuture of fixed operating costs, then the management of the company must be taken to task by the investors. It can also point towards deteriorating corporate governance.
Thus, Operating Margins of a business shall be studied historically. It can easily tell you how the business has fared in the past and can give important insights about its future.
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