Certified Valuation Analyst (CVA) Practice Exam

How is operating margin percentage calculated?

1. Gross profit divided by net sales

2. Net sales minus cost of sales

3. Income from operations divided by net sales

4. Net income divided by total sales

The correct answer is: Income from operations divided by net sales

The operating margin percentage is calculated by taking income from operations and dividing it by net sales. This metric provides insight into how effectively a company is generating profit from its core operational activities, excluding other factors such as taxes and interest. It reflects the efficiency of a company's management and its ability to control costs related to its everyday business operations. By focusing specifically on income derived from operations, this measure helps analysts and stakeholders assess the profitability of the core business, providing a clearer picture of operational performance without the influence of non-operational income or expenses. This focus is essential for evaluation, especially in comparison with other companies in the same industry or sector. In contrast, other options represent different financial metrics that, while important, do not specifically indicate the operating margin. Gross profit divided by net sales gives the gross margin, which considers only the cost of goods sold and does not account for operating expenses. Net sales minus cost of sales simply gives the gross profit, and net income divided by total sales includes all revenues and expenses, making it a broader measure that doesn't focus specifically on operations.