What is Operating Margin?
A profitability ratio that measures the percentage of revenue remaining after operating expenses, calculated by dividing operating income by revenue.
Understanding Operating Margin
Operating margin is calculated as: (Revenue - Operating Expenses) ÷ Revenue × 100, or more simply: Operating Income ÷ Revenue × 100. For example, if a glamping resort generates $800,000 in revenue and has $480,000 in operating expenses, the operating income is $320,000, and the operating margin is 40% ($320,000 ÷ $800,000 × 100).
Operating margin provides insight into a property's operational efficiency and profitability. Higher operating margins indicate that a property is more efficient at converting revenue into profit, while lower margins may suggest high operating costs relative to revenue or pricing that doesn't adequately cover expenses.
For outdoor hospitality properties, operating margins typically range from 30% to 50%, depending on property type, location, amenities, and management efficiency. Properties with higher operating margins are generally more profitable and may command higher valuations.
Operating margin is useful for:
- Comparing properties of similar type and size
- Assessing operational efficiency over time
- Identifying opportunities to improve profitability
- Evaluating the impact of cost reductions or revenue increases
It's important to note that operating margin excludes non-operating items like debt service, income taxes, and capital expenditures. It focuses purely on operational performance, making it useful for comparing properties regardless of financing structure.
Operating margin can vary by property type. For example, glamping resorts may have higher operating margins due to premium pricing, while basic campgrounds may have lower margins due to lower rates and higher maintenance costs relative to revenue.
In feasibility studies and appraisals, operating margin analysis helps assess operational efficiency, identify improvement opportunities, and compare properties. Understanding operating margins helps investors evaluate profitability potential and make informed investment decisions.
Sage Outdoor Advisory includes operating margin analysis in our feasibility studies and appraisals, helping clients understand operational efficiency, identify improvement opportunities, and assess profitability potential.
Examples of Operating Margin
- •A glamping resort generates $900K annual revenue with $450K operating expenses. Operating income = $450K. Operating margin = $450K ÷ $900K = 50%. This strong 50% margin indicates efficient operations and good profitability, meaning half of every revenue dollar becomes operating profit.
- •An RV park shows $750K revenue and $375K operating expenses. Operating margin = ($750K - $375K) ÷ $750K = 50%. By comparing this to industry benchmarks of 40-45% for RV parks, the property demonstrates above-average operational efficiency.
- •A campground with $500K revenue and $350K operating expenses has operating margin = ($500K - $350K) ÷ $500K = 30%. This lower margin suggests opportunities to either increase revenue (raise rates, improve occupancy) or reduce operating expenses to improve profitability.
Common Use Cases
- •Assessing operational efficiency and profitability
- •Comparing properties of similar type and size
- •Identifying opportunities to improve profitability
- •Evaluating the impact of cost or revenue changes
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Frequently Asked Questions About Operating Margin
What's a good operating margin for outdoor hospitality properties?
Operating margins typically range from 30% to 50% for outdoor hospitality properties. Higher margins (45-50%) indicate strong operational efficiency, while lower margins (30-35%) may suggest opportunities for improvement. Margins vary by property type, with premium properties often achieving higher margins.
How is operating margin calculated?
Operating margin = (Revenue - Operating Expenses) ÷ Revenue × 100, or Operating Income ÷ Revenue × 100. It expresses operating profit as a percentage of total revenue.
What does operating margin tell you?
Operating margin shows how efficiently a property converts revenue into profit after covering operating expenses. Higher margins indicate better operational efficiency and profitability. It's useful for comparing properties, assessing efficiency over time, and identifying improvement opportunities.
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