What is operating ratio?
Operating ratio is the measurement of a company's operating expenses, calculated by comparing operating expenses to net sales. The ratio is expressed as a percentage, with smaller ratios demonstrating a greater ability for an organisation to generate profit should its revenue decrease.
Where have you heard about operating ratio?
Operating ratio is a very popular tool for analysts when analysing performance trends. Companies comparing their operating ratios with those of similar firms in the industry is also considered to be common practice, particularly for companies with high operating expenses (e.g. railroads).
What you need to know about operating ratio.
Operating ratio is considered an effective measure of a company's efficient use of capital and managerial resources. The ratio is simply calculated by dividing the operating expenses by the net sales, with operating expenses including all expenses aside from taxes, interest, debt repayments and costs associated with expansion. The ratio also takes into account non-operating expenses with each item listed on the company's income statement. Although companies regularly compare operating ratios, it is important to note that some companies may have a great deal of debt; therefore debt ratio should also be compared.
Find out more about operating ratio.
Explore a similar ratio by reading our definition of debt ratio.