What is the Operating Ratio? (2024)

FAQs

What is the answer of operating ratio? ›

Here is the formula to calculate an operating ratio:Operating ratio = (operating expenses + cost of goods sold) / net salesYou may find several of these on income reports for the company, especially operating expenses and cost of goods.

The operating ratio shows the efficiency of a company's management by comparing the total operating expense (OPEX) of a company to net sales. The operating ratio shows how efficient a company's management is at keeping costs low while generating revenue or sales.

The operating ratio is calculated by dividing a company's total operating costs by its net sales. Sales represent the starting line item of the income statement (“top line”), whereas operating costs refer to the routine expenses incurred by a company as part of its normal course of operations.

The ideal OER is between 60% and 80% (although the lower it is, the better).

The operating ratio compares production and administrative expenses to net sales. The ratio reveals the cost per sales dollar of operating a business.

The overall operating ratio is a ratio to show the insurer's pre-income tax profitability, taking into account investment income.

An operating ratio above 100 means that the company's revenue is not sufficient to cover its operating expenses, much less have profit left over for debt service or to return to shareholders.

Operating profit = Net sales – (Cost of goods sold + Administrative and office expenses + Selling and distribution exp.) Since, the operating profit ratio is expressed as a percentage, therefore we need to multiply by 100, the value obtained by the division of operating profit with the net sales.

A higher ratio would indicate that expenses are more than the company's ability to generate sufficient revenue and may be considered inefficient. Similarly, a relatively low ratio would be considered a good sign as the company's expenses are less than that of its revenue.

An efficiency ratio of 50% or under is considered optimal.

How to improve operating ratio? ›

You can improve your efficiency ratio in one of two ways: becoming more productive or becoming more efficient. If you focus on productivity, then you'd take steps to increase the amount of revenue that comes in for the same amount of labor.

The definition of a good profit margin depends on the type of industry in which a company operates⁵. Generally, a 10% operating profit margin is considered an average performance, and a 20% margin is excellent. It's also important to pay attention to the level of interest payments from a company's debt.

A smaller value or lower value of the ratio is recommended as it will make the company more efficient in generating revenue. Rise in the value of the operating ratio is indicative of the decline in the efficiency.

Operating performance ratios also called as Activity Ratios, measure the efficiency and effectiveness of a company in using its assets on the balance sheet for conversion to revenue, in other words, the operational performance of the company.

The operating expense ratio (OER) is determined by dividing a real estate property's operating expenses by its gross operating income (GOI). Low Operating Expense Ratio → A lower OER indicates the property is run efficiently by management (and vice versa for a higher OER ratio).

Ratio does not mean multiply. Ratios can be written as fractions and the fraction bare means division. Ratios mean division. For instance the ratio 1 to 3 means 1 divided by 3.