Companies with a good operating margins have more wiggle room in tight situations

What is a Good Operating Margin? is an important question to answer when youre analyzing a business. Its also important to keep an eye on operating margins when trading stocks. Thats because a good operating margin indicates your company is on a path to profit.

So

In this blog post youll learn What Makes a Good Operating Margin and how you can use this operational metric to find the best stock picks in your favourite industries. So lets get down to business

What is a Good Operating Margin in Your Industry?

A good operating margin depends on what industry you are in. Of course you always want a positive operating margin for it to be considered good. But beyond that intra-industry analysis is the best way to look at what makes a good operating margin. Thats because if youre trying to figure out what a good operating margin on your stock investment is, you want to make sure that your analysis is not comparing apples and oranges. It doesnt make sense to compare the operating margins of a highly-customized specialty business to Walmart.

Instead

By comparing the operating margin of your stock to other similar companies you can get a good look at how the companys operations stack up relative to its peers. A good operating margin might be reflected in a higher P/E ratio  (relative to industry peers) so make sure you keep an eye on how much good operating margins are costing you.

The operating margin is also called the Return on Sales (ROS) and is a key measure of profitability. A good operating margin indicates that a high amount of the sales volume from operations is getting returned to the company. Again, this tends to vary widely across industries so be sure to look at operating margin in your own industry to see what a good operating margin means for you.

In the video below, you can watch how to find out what good operating margin is in your industry using the free stock screene r below:

What is a Good Operating Margin [VIDEO]:

Why a Good Operating Margin is Important:

Now that you know what a good operating margin is, you might be wondering why a focus on operating margin is important. The main reason a good operating margin is something I like to consider is because it tells you how profitable the company is based on the day-to-day operations. This sounds simple. But the implications are profound for traders and investors of all types

If a company is running with positive operating margins then you can get a middle of the road sense for how easily the company is selling (both absolutely and relative to its peers). This is especially important if you are analyzing companies with only a few product lines or services. The operating margin tells you how much wiggle room the company has if the competitive environment or industry positioning starts to change. And it tells you the direction the company is currently headed

So while you might think a good operating margin is only important for long-term buy-and-hold investors, swing traders and position traders can benefit from looking at operating margin too. Since margin from operations gives you an indicator of the profit status quo at your stock ticker of interest, it can tell you if the current trend in the stock price is sustainable. For example

If a stock is going up to the moon but it is running a huge operating loss (and showing negative operating margins) then you might want to hop off this momentum favourite before the train comes off the rails. On the other hand improvements in an already good operating margin can provide further fuel to future earnings.

Summary: What Is a Good Operating Margin?

In short, a good operating margin is a positive one. And across industries youll find the best companies generally operate with higher margins. Additionally, a good operating margin can provide validation or a warning sign for trend-following momentum traders so, with all that in mind do you have any other questions about what a good operating margin is?

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