The change in operating profit divided by the change in revenue; how much of each new sales dollar drops to the profit line.
Incremental margin is the forward-looking version of operating-margin. A company at a 14% margin whose incremental margin is 35% is on a path to much higher profitability if growth continues, because most new revenue arrives against fixed-costs already paid for.
In a downturn the same arithmetic bites: the decremental margin shows how fast profit falls when revenue does. Management teams often guide to a target incremental margin, which is a useful thing to hold them to.
Example: Northwind Tools adds $62M of revenue and $25M of operating income, a 40% incremental margin against a 14.3% reported margin. Another $100M of revenue at that rate would lift margin to 16.4%.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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