Remember that Gross Profit is equal to Net Sales - Cost of Goods Sold. Therefore, Gross Margin represents the percentage of revenue remaining after Cost of Goods Sold is deducted. Let us take a look at a simple example. A firm with a ratio superior to the industry average demonstrates superior efficiency in its production processes. The higher the ratio, the higher the efficiency of the production process.
Investors tend to favor companies that are more efficient.
Operating Margin . As the name implies, operating margin is the resulting ratio when Operating Income is divided by Net Sales. This ratio measures the quality of a firm's operations. A firm with a high operating margin in relation to the industry average has operations that are more efficient. Typically, to achieve this result, the company must have lower fixed costs, a better gross margin, or a combination of the two.