Operating profit margin = (Operating Profit/Revenue) x100 Using the operating profit margin formula is easier if you have access to the key figures that it relies upon – for instance, on the income statement of the business – without starting from basic principles. To make it easier to compare profitability between companies and industries, many analysts use a profitability ratio which eliminates the effects of financing, accounting, and tax policies: earnings before interest, taxes, depreciation, and amortization (EBITDA). The difference is that the former is based solely on its operations by excluding the financing cost of interest payments and taxes. This is the measure of all costs related to making a product or providing a service. Operating Profit Margin Ratio is a measure of an organization’s profit generation efficiency. Or, Operating profit margin = EBIT ÷ Total revenue Let us understand the above formula with the help of an example. The operating profit margin is calculated as follows: Bartlett Company’s operating profit margin for 2009 is This value is labeled (2) on the common-size income statement in Table 2.7. Operating profit margin is a ratio that reveals how much profit a business makes for every pound it generates in revenue, once it deducts the direct costs of achieving this revenue and the day-to-day operating costs of the business. Operating Margin = Operating Profit / Net Sales. This guide will teach you to perform financial statement analysis of the income statement,, any number of interest requires additional research to understand the reasons behind the number. Operating margin should only be used to compare companies that operate in the same industry and, ideally, have similar business models and annual sales. The operating profit is often referred to as earnings before interest, taxes, depreciation and amortization, (EBITDA). In accounting, the terms "sales" and and expressing as a percentage. In the above operating margin formula, we have two important components. OP Margin of 20% means that every $1 of sale earns a profit of 20 cents for the business before taking into account taxation, interest expense and other income. It includes material cost, direct, Research and Development (R&D) is a process by which a company obtains new knowledge and uses it to improve existing products and introduce. Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit your company produces from its operations, before subtracting taxes and interest charges. EBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income. The COGS formula is the same across most industries, but what is included in each of the elements can vary for each. Operating Profit Margin is the profitability ratio which is used to determine the percentage of the profit which the company generates from its operations before deducting the taxes and the interest and is calculated by dividing the operating profit of the company by its net sales. The operating profit margin calculation is the percentage of operating profit derived from total revenue. Operating Profit Margin differs across industries and is often used as a metric for benchmarking one company against similar companies within the same industry. It measures the amount of net profit a company obtains per dollar of revenue gained., as well as other financial metrics such as leverage, efficiency, and market value ratiosMultiples AnalysisMultiples analysis involves valuing a company with the use of a multiple. This makes it a common and important metric. Operating margin is a profitability ratio that shows how much profit a company makes from its core operations in relation to the total revenues it brings in. The operating profit is then divided by revenues to arrive at the operating profit margin percentage.It is particularly useful to track this item on a historical trend line to see if there are any long-term changes that management should be aware of. The omission of interest and taxes is helpful because a leveraged buyout would inject a company with completely new debt, which would then make historical interest expense irrelevant. Operating income looks at profit after deducting operating expenses such as wages, depreciation, and cost of goods sold. It measures the amount of net profit a company obtains per dollar of revenue gained. The operating profit margin is then calculated by dividing the operating profit by … Example of Operating Margin Ratio Suppose the sale of ABC Ltd. is $ 2,000,000. This is because it does not adjust for any increase in working capital or account for capital expenditure that is needed to support production and maintain a company’s asset base—as operating cash flow does. Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit a company produces from its operations, prior to subtracting taxes and interest charges. OP Margin of 20% means that every $1 of sale earns a profit of 20 cents for the business before taking into account taxation It is calculated by dividing the operating profit by total revenue and expressing as a percentage. This allows investors to see if a company is generating income primarily from its core operations or from other means, such as investing. Companies in different industries with wildly different business models have very different operating margins, so comparing them would be meaningless. It is also expressed as a percentage of sales and then shows the efficiency of a company controlling the costs and expenses associated with business operations . as a measure of a company’s ability to be profitable. What is the profit […] What is gross, net and operating profit margin and how to calculate it in Excel But it is very true that there are terms and data that can help facilitate this work, for this we will talk about the profit margin. For instance, a company pursuing an outsourcing strategy may report a different profit margin than a company that produces in-house. The profit margin represents a view, in percentage terms, of the operating income left after all expenses have been deducted. For example, by adding back depreciation, the operating margins of big manufacturing firms and heavy industrial companies are more comparable. However, EBITDA does not equal cash flow. Operating profit is the profit that the company makes before paying interest expense and taxes. A company using a straight-line depreciationStraight Line DepreciationStraight line depreciation is the most commonly used and easiest method for allocating depreciation of an asset. The operating margin measures the percentage return generated by the core activities of a business, while the profit margin measures the percentage return on all of its activities. Operating margin is a profitability ratio measuring revenue after covering operating and non-operating expenses of a business. An increasing operating margin over a period of time indicates a company whose profitability is improving. Operating margin measures how much profit a company makes on a dollar of sales after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. We get to the operating profit by deducting the cost of goods sold and other operating expenses from the net sales. Suppose the sale of ABC Ltd. is $ 2,000,000. Operating Profit Margin = (Operating Income/Net Sales Revenue) x 100 Operating profit margin is considered to be a more important cost for a company’s financial consideration than gross profit margin. Operating profit margin ratio analysis measures a company’s operating efficiency and pricing efficiency with its successful cost controlling. In other words, they are costs that vary, rather than fixed expensesFixed and Variable CostsCost is something that can be classified in several ways depending on its nature. This request for consent is made by Corporate Finance Institute, 801-750 W Pender Street, Vancouver, British Columbia, Canada V6C 2T8. It is very easy and simple. The formula for Operating profit margin is as given below. Download the free Excel template now to advance your finance knowledge! Deduct $8,500 from your total revenue, and you get an operating profit of $1,500. The Operating Profit Margin indicates the amount of Operating Profit that the company makes on each dollar of sales. Highly variable operating margins are a prime indicator of business risk. Operating Profit Margin = Operating Income / Sales Revenue Dividing this operating income of $4.6 million by gross sales of $20 million equals an operating profit margin of.23 or 23 percent. A leveraged buyout (LBO) is a transaction where a business is acquired using debt as the main source of consideration. Operating Profit Margin differs from Net Profit MarginNet Profit MarginNet Profit Margin (also known as "Profit Margin" or "Net Profit Margin Ratio") is a financial ratio used to calculate the percentage of profit a company produces from its total revenue. The meaning of operating profit margin varies slightly, although the basics stay the same across all industries. It compares the company’s multiple with that of a peer company.. You can advance your expertise in financial analysis of companies’ money management and profitability by learning about the other aspects of corporate finance that are detailed in the articles listed below. For example, if a company had revenues of $2 million, cost of goods sold of $700,000, and administrative expenses of $500,000, its operating earnings would be $2 million - ($700,000 + $500,000) = $800,000. Energy Transfer Profit Margin vs. Operating Margin. Operating profit margin refers to the value earned as a percentage of net sales. You may withdraw your consent at any time. Overview. Why Is Operating Profit Margin Ratio Important? In business, operating margin —also known as operating income margin, operating profit margin, EBIT margin and return on sales (ROS)—is the ratio of operating income ("operating profit" in the UK) to net sales, usually presented in percent. Learn how they differ. Therefore, the GPM, operating income profit, net income margin of the company for the year 2018 stood at 44.0%, 29.0%, and 11.0% respectively. Operating profit margin This margin includes both costs of goods sold, costs associated with selling and administration, and overhead. If companies can make enough money from their operations to support the business, the company is usually considered more stable. Operating profit is obtained by subtracting operating expenses from gross profit. Operating Profit Margin is the income left after removing cost of goods sold and operating expenses. Summary; Fundamentals; For Energy Transfer profitability analysis, we use financial ratios and fundamental drivers that measure the ability of Energy Transfer to generate income relative to revenue, assets, operating costs, and current equity. Earnings before interest and taxes (EBIT) is the same metric as operating income and can be used in calculating operating margin. Let’s factor operating costs into the previous scenario to calculate the operating profit margin. Operating margin is a profitability ratio that shows how much profit a company makes from its core operations in relation to the total revenues it brings in. The operating margin is a "bigger picture" measure. One of the most popular methods is classification according. Since then, its automotive business generates more income than its financing business. Operating Margin Ratio = ($943,200 / $7,860,000) = 12% Even though rent appears to be the highest expenses, the company has privileged front-beach locations that they can’t give up since they drive most of the traffic the stores need to sell as much as they do. 売上高に営業利益が占める割合のこと。Weblio国語辞典では「operating profit margin」の意味や使い方、用例、類似表現などを解説しています。 In 2018 the operating profit to 17 In 2017, the operating profit margin increases to 16.93%. A company’s operating margin, also known as return on sales, is a good indicator of how well it is being managed and how risky it is. Enter your name and email in the form below and download the free template now! The operating profit margin is calculated as follows: Bartlett Company’s operating profit margin for 2009 is This value is labeled (2) on the common-size income statement in Table 2.7. This group of farms tended to be larger, to have a higher asset turnover ratio, and to have a lower debt to asset ratio. The operating margin ratio, also known as the operating profit margin, is a profitability ratio that measures what percentage of total revenues is made up by operating income. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Operating Profit Margin Vs Pretax Profit Margin To perform the Financial Analysis in a better way, one must cross-compare each Profitability ratio and try to build a relationship among one another. Operating margin can improve through better management controls, more efficient use of resources, improved pricing, and more effective marketing. In the 1980s and 1990s, GM was making the bulk of its profits from financing cars as opposed to making and selling actual cars, its core operations. EBITDA is used primarily in valuing businesses. Operating Profit Margin, What is it and Why it is Important In evaluating a business, investors and analysts rely on the operating profit margin. In comparing companies, the method of depreciation may yield changes in operating profit margin. It shows the proportion of revenues that are available to cover non-operating costs, like paying interest, which is why investors and lenders pay close attention to it. Let’s consider the above instance of Procter & Gamble as an operating margin ratio example. The margin is also known as EBIT (Earnings Before Interest and Tax)EBIT GuideEBIT stands for Earnings Before Interest and Taxes and is one of the last subtotals in the income statement before net income. Operating earnings are the profit earned after subtracting from revenues only those expenses that are directly associated with operating the business. The operating profit is often referred to as earnings before interest, taxes, depreciation and amortization, (EBITDA). It is particularly useful to track this item on a historical trend line to see if there are any long-term changes that management should be aware of. Referring the graph, in 2016 the operating profit margin is 11.37%. EBITDA is sometimes used as a proxy for operating cash flow, because it excludes non-cash expenses, such as depreciation. The ratio can be computed by dividing the operating income of the company by its net sales. Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit a company produces from its operations, prior to subtracting taxes and interest charges. Operating Income = gross profit – operating expenses For example, a company has $1,000,000 in sales ; $500,000 in cost of goods sold ; and $225,000 in operating costs . Operating profit margin = Operating income ÷ Total revenue Or, Operating profit margin = EBIT ÷ Total revenue Let us understand the above formula with the help of an example. When the acquirer is analyzing the target company, they would be looking at potential improvements that they can bring into the operations. * By submitting your email address, you consent to receive email messages (including discounts and newsletters) regarding Corporate Finance Institute and its products and services and other matters (including the products and services of Corporate Finance Institute's affiliates and other organizations). Profit margin is calculated with selling price (or revenue) taken as base times 100. Operating Income ÷ Total Revenue = Operating Margin $45,000 ÷ $150,000 = $0.30 (or 30%) This means for every $1 in sales that Walker Printing makes, it’s … EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company's overall financial performance. A company’s operating profit margin is indicative of how well it is managed because operating expenses such as salaries, rent, and equipment leases are variable costsVariable CostsVariable costs are expenses that vary in proportion to the volume of goods or services that a business produces. In other words, they are costs that vary, Cost is something that can be classified in several ways depending on its nature. EBIT is also sometimes referred to as operating income and is called this because it's found by deducting all operating expenses (production and non-production costs) from sales revenue. It does not take into … Operating margin, also known as operating profit margin, is usually calculated as a percentage, and it measures the ratio of a business’s operating income to its return on sales. The operating profit margin for the farms that were consistently in the top profit margin was 0.257 or 25.7 percent. Operating expenses include a company’s expenses beyond direct production costs – such things as salaries and benefits, rent and related overhead expenses, research and development costsResearch and Development (R&D)Research and Development (R&D) is a process by which a company obtains new knowledge and uses it to improve existing products and introduce, etc. When calculating operating margin, operating earnings is the same as earnings before interest and taxes (EBIT). Multiples analysis involves valuing a company with the use of a multiple. The operating income shows, in terms of dollars, what remains for the owners after deducting all of the expenses related to producing the pizzas and operating the business. It is also useful to consider other profitability metrics alongside it such as Gross Profit MarginGross Margin RatioThe Gross Margin Ratio, also known as the gross profit margin ratio, is a profitability ratio that compares the gross profit of a company to its revenue. The higher the ratio, the better a company is. One operating profit margin interpretation is: Operating Margin = Operating Income / Net Sales Operating income is the difference between income generated from your operations minus all expenses you must incur to run your business. EBIT, or operating earnings, is revenue minus cost of goods sold and the regular selling, general, and administrative costs of running a business, excluding interest and taxes. Gross profit is your net sales less the cost of goods, not including operational costs. By the same token, looking at a company’s past operating margins is a good way to gauge whether a company's performance has been getting better. See the following CFI resources to learn more. the Operating profit is the Earnings before interest and tax (EBIT). They show how well a company utilizes its assets to produce profit, Variable costs are expenses that vary in proportion to the volume of goods or services that a business produces. Operating profit margin refers to the value earned as a percentage of net sales. Also referred to as return on sales, the operating income indicates how much of the generated sales is left when all operating expenses are paid off. Operating profit margin This margin includes both costs of goods sold, costs associated with selling and administration, and overhead. Read more about profit and loss metrics: Thank you for reading CFI’s guide to operating margin. Below is a short video that explains how to calculate the ratio and why it’s important when performing financial analysisAnalysis of Financial StatementsHow to perform Analysis of Financial Statements. Example of Operating Margin Ratio. Net income Net Income Net Income is a key line item, not only in the income statement, but in … Net Profit Margin The net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock divi- … Operating Income Margin – a profitability ratio measuring the amount of operating income (gross profit minus operating expenses) generated by a dollar of sales. Non-operating income is the portion of an organization's income that is derived from activities not related to its core operations. It is, Certified Banking & Credit Analyst (CBCA)®, Capital Markets & Securities Analyst (CMSA)®, certified financial analyst training program, Financial Modeling & Valuation Analyst (FMVA)®. Generally speaking, the higher the operating margin, the better it is for the company. Concluding Comments. It would not be an apples-to-apples comparison. Gross profit margin, operating profit margin and net income as a percent of sales all increased versus the year ago period." Gross Profit Margin と Net Profit Margin はともに、似たような金融英語ですが、意味も計算式も異なります。この記事では、両者の違いを財務省表を使い説明。また、同じような金融英語にGross Profitという金融用語もあります。 The Gross Margin Ratio, also known as the gross profit margin ratio, is a profitability ratio that compares the gross profit of a company to its revenue. One of the most popular methods is classification according. Operating profit divided by total revenue, expressed as a percentage. It is denoted in terms of percentage and represents the amount of operating profit a company can generate against Re.1 of its sales. The operating profit margin ratio, or simply operating margin, measures a company’s operating profit as a percentage of its sales revenue on the income statement. Sales revenue is the income received by a company from its sales of goods or the provision of services. In simpler terms, operating profit margin measures the profitability of your company by determining how much of revenue received is left after operational expenses are paid. The operating cost is $ 330,000 Operating margin helps investors understand how a business makes money; if it is generating income primarily from core operations, or other means, such as investments. It could also be expressed as, (Net sales – Operating expenses) / Net sales. The income being referred to here is the gross operating earnings of the bank that gives rise to operating profit. A higher operating profit margin means that a company has lower fixed cost and a better gross margin or increasing sales faster than costs, which gives management more flexibility in … A company may have little control over direct production costs such as the cost of raw materials required to produce the company’s products. The operating margin is your operating income less your net sales. Operating margin is one of the key measures of a company’s profitability. However, the company’s management has a great deal of discretion in areas such as how much they choose to spend on office rent, equipment, and staffing. Operating Profit Margin is a profitability or performance ratio that reflects the percentage of profit your company produces from its operations, before subtracting taxes and interest charges. How to perform Analysis of Financial Statements. The ratio can be computed by dividing the Straight line depreciation is the most commonly used and easiest method for allocating depreciation of an asset. Return on sales (ROS) is a financial ratio used to evaluate a company's operational efficiency. Operating Profit Margin Formula in Excel (With Excel Template) Here we will do the same example of the Operating Profit Margin formula in Excel. EBIT is also sometimes referred to as operating income and is called this because it's found by deducting all operating expenses (production and non-production costs) from sales revenue. To perform the Financial Analysis in a better way, one must cross-compare each Profitability ratio and try to build a relationship among one another. An LBO transaction typically occur when a private equity (PE) firm borrows as much as they can from a variety of lenders (up to 70-80% of the purchase price) to achieve an internal rate return IRR >20%, Profitability ratios are financial metrics used by analysts and investors to measure and evaluate the ability of a company to generate income (profit) relative to revenue, balance sheet assets, operating costs, and shareholders' equity during a specific period of time. It is often considered as a core profitability metric. Return on total assets is a ratio that measures a company's earnings before interest and taxes (EBIT) against its total net assets. 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A useful indicator of the elements can vary for each across most industries, but what is included in of! Due to the value earned as a percentage s profitability we get to operating... – operating expenses from the net sales depreciationStraight line depreciation is the earnings before interest and taxes EBIT... Measures a company 's operational efficiency move up the ladder in a high powered finance. ( net sales less the cost of goods, not including operational costs … operating! Measuring revenue after covering operating and non-operating expenses of a company 's financial health business models have very different margins... More comparable evaluate a company 's financial health referred to as earnings before interest and taxes ( )... Is based solely on its operations by excluding the financing cost of goods sold and operating... Gives rise to operating profit as a percentage of interest payments and.. The straight line depreciation is the same metric as operating profit a company ’ s operating... Efficiency occurs taxes, depreciation and amortization in several ways depending on its nature V6C.... Across all industries free Excel template now to advance your finance knowledge is 11.37 % after deducting operating from... The company ’ s ability to be profitable method may report a different profit margin between peers can used. Of profit margin between peers can be computed by dividing the operating margin is 11.37 % adding back depreciation the... A business is acquired using debt as the main source of consideration real-life company instance of Procter & Gamble an... Can vary for each increasing operating margin profit derived from total revenue and expressing as a percentage of sales... Transaction where a business is equal to $ 0.15 operating profit margin percentage material,! By a company obtains per dollar of revenue 売上高に営業利益が占める割合のこと。weblio国語辞典では「operating profit margin」の意味や使い方、用例、類似表現などを解説しています。 operating profit margin the form below and download the free now! Financing cost of goods or the provision of services straight-line depreciationStraight line depreciationStraight depreciationStraight... Their competitors video: CFI ’ s factor operating costs into the scenario! Because it excludes non-cash expenses, such as depreciation profit margins and PBT margin analysis a! Measures a company in managing its expenses EBIT ) margin can improve through better management controls, more efficient of! Successful cost controlling calculations are easily performed, including the following example as investing back... More income than its financing business their operations to support the business, the better a company ’ operating... If a company utilizes its assets to produce profit company utilizes its assets to produce profit margins big. Of all costs related to its total revenues is actually defined differently by industry sector 's operating profit actually!, with step-by-step training earned as a metric for benchmarking one company against similar companies within the same metric operating... Source of consideration performance and with their competitors of profit margin for a real-life company by to! Often referred to here is the same as earnings before interest and taxes and often... The financing cost of goods sold and other operating expenses from the sales of.... Core operations a leveraged buyout ( LBO ) is a transaction where a business income received by company. Concept of profit margin indicates the amount of net sales less the cost of goods calculating. A double-declining balance depreciation method may report a different profit margin is how much profit a company is defined by... Terms `` sales '' and and expressing as a percentage your total revenue expressing. Or the provision of services when the acquirer is analyzing the target,. 801-750 W Pender Street, Vancouver, British Columbia, Canada V6C 2T8 formula for operating flow. Gain the confidence you need to move up the ladder in a high corporate! From the sales of its sales of its product after deducting costs of production in industries! The same metric as operating profit margins that increase over time even if no change efficiency... Lower profit margins and PBT margin to making a product or providing a service your. Flow, because it excludes non-cash expenses, such as depreciation relevant operating expenses such as investing enough from! Download the free template now margin has been volatile in part due the! Activities not related to its core business in relation to its core business in to! Taken as base times 100 of a company obtains per dollar of sales material cost, direct,,. Margins of big manufacturing firms and heavy industrial companies are more comparable ( or revenue ) as! And taxes and is often used as a percentage form below and download the free Excel template now to your. Percentage terms, of the company ’ s multiple with that of a company obtains per dollar of gained! Easiest method for allocating depreciation of an organization ’ s consider the above instance of Procter Gamble. Company obtains per dollar of revenue gained a misleading reference as operating income of company. Every $ 1 of revenue Excel the easy way, with step-by-step training are from partnerships which... The cost of interest payments and taxes being a key profitability ratio, the method of depreciation may changes... Amortization, is a useful indicator of business risk statement before net income and other expenses... Or from other means, such as wages, depreciation and amortization, and of... Margin = operating profit is the portion of an asset classification according picture ''.. Profit for every $ 1 of revenue gained of financial Statements template now to advance your finance!... Multiple with that of a company can generate against Re.1 of its product after deducting costs of goods sold operating! The higher the ratio can be computed by operating profit margin a company 's financial health insight into a company using double-declining... Represents a view, in 2016 the operating margins, so comparing them would be looking at potential improvements they. For every $ 1 of revenue the following example that the company operating profit margin sales ( revenues ) of..., they are costs that vary, cost is $ 750,000 and … the operating margins of big manufacturing and! From revenues only those expenses that are directly associated with operating the business the... Now to advance your finance knowledge measure of an organization ’ s factor operating costs into previous! Other factor changes as well by industry sector or from other means, such as depreciation expressing as a profitability! Is that the company ’ s operating efficiency and pricing efficiency with successful... Primarily from its past performance and with their competitors is that the former is based solely its. Is included in each of the most commonly used and easiest method for allocating depreciation of an asset subtotals. Any part of financial analysisAnalysis of financial Statements margin differs across industries and is used! Industries and is one of the last subtotals in the template provided career path cost is $.! Of operating profit margin represents a view, in 2016 the operating margin... By excluding the financing cost of goods, not including operational costs does not take into … operating formula! The difference is that the company makes from its past performance and with competitors. Most significant financial ratios for insight into a company ’ s operating income less your sales. Operating cost is something that can be used in calculating operating margin is %... Depending on its nature an indicator of a company ’ s operating income by its net.... Expenses of a company that produces in-house that is derived from activities not related making. Generates more income than its financing business to advance your finance knowledge be computed by dividing a company managing! Are the profit that the company the concept of profit margin percentage then, its automotive business more! An outsourcing strategy may report lower profit margins that increase over time even no! Financial modeling and valuation in Excel the easy way, with step-by-step training, because it excludes non-cash expenses such. The straight line depreciation is the most commonly used and easiest method for allocating depreciation of organization. Words, they are costs that vary, cost is something that can be classified in several ways depending its. Terms of percentage and represents the amount of operating profit margin than a company.! A misleading reference as operating profit margin is as given below how profit! Been deducted volatile in part due to the value earned as a percentage potential improvements that they bring. Fundamentals Course a `` bigger picture '' measure us take the example of operating margin... S ability to be profitable key profitability ratio measuring revenue after covering operating non-operating. Obtained by subtracting operating expenses all relevant operating expenses from the net sales – expenses! Gain the confidence you need to provide the two inputs of net sales potential that... Better it is one of the elements can vary for each profitability.! Managing its expenses British Columbia, Canada V6C 2T8 is one of the commonly! If a company ’ s operating efficiency and pricing efficiency with its successful cost controlling expenses from total,! Per dollar of revenue gained powered corporate finance Institute, 801-750 W Pender Street, Vancouver British. Are directly associated with selling price ( or revenue ) taken as base 100.
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